Aug 09 2018

Lira should recover by year’s end – economists

Thanks to recent prudent fiscal policy and a low government debt ratio, the Turkish lira should make gains to reverse a significant amount of its losses in value by the year’s end, economists Georgette Boele and Nora Neuteboom wrote for Dutch bank Abn Amro’s business news website.

However, the base scenario used by the economists assumes that Turkey is able to service its external debt, and they accept there are considerable risks this assumption will not prove correct.

The lira’s continuing plunge, which sees the currency at a record low of 5.56 to the dollar at the time of writing, is down to several factors, said Boele and Neuteboom.

These include Turkish President Recep Tayyip Erdoğan’s determination to tighten his grip on Turkish monetary policy, his aversion to raising interest rates despite high inflation, and serious signs the economy is overheating.

The threat of further escalation after Washington placed sanctions on two Turkish ministers as a reprisal for the imprisonment of U.S. citizens and employees has further exacerbated the currency’s weakness.

“In light of these events, investors worry that Turkey won’t be able to finance its external financing requirement of around USD 218bn,” the article said.

However, Turkey is likely aware of the danger of escalating the rift with the United States, and will likely find a solution to the diplomatic crisis, according to the economists.

Moreover, the high foreign currency debt is mostly owed by private borrowers, and the government’s low debt ratio and prudent recent fiscal policies mean it is likely “able to withstand a period of increasing contingent liabilities,” they said.

The economy is likely to cool to two percent growth by the year’s end, they added.

However, an escalation of the row with Washington could result in sanctions on Turkey that would prove financially crippling, and if Turkey does not recalibrate its macro-economic policies to reduce vulnerabilities and effect a “managed slowdown,” the lira could continue to depreciate by as much as 25 percent, they warned.