Turkish lira fair value revised to 9.5 per dollar at IIF

The Institute of International Finance revised its fair value estimate for the lira to 9.5 per dollar citing a deterioration in market confidence since President Recep Tayyip Erdoğan sacked and replaced the central bank governor in March.

The IIF changed its forecast from 7.5 per dollar, said Robin Brooks, the organisation’s chief economist and a former head of foreign currency strategy at Goldman Sachs.

“This change is driven by a sharp deterioration in sentiment,” Brooks said on Twitter on Sunday. The IIF's estimate had stood at 5.5 per dollar early last year before two revisions in April and June.

Erdoğan sacked former finance minister Naci Ağbal as governor in mid-March after he raised the benchmark interest rate to 19 percent from 17 percent to defend the lira and rein in double-digit inflation. His successor, Şahap Kavcıoğlu, has sympathised with Erdoğan’s unconventional theory that high interest rates stoke inflation. He has refused to say whether the central bank will increase borrowing costs again if needed.

The lira has lost 28 percent of its value since the start of last year. Almost half of those losses have occurred since Ağbal's departure on March 20.

Kavcıoğlu said last week that he expected annual inflation to peak at about 17 percent in April before slowing markedly in the second half of the year. He pledged to keep interest rates at a margin above inflation, without providing an exact level.

Investor sentiment towards the lira has also worsened after the central bank spent tens of billions of dollars of its foreign currency reserves last year defending the lira, leaving net reserves deeply in the red. The lira fell to a record low of 8.58 per dollar in early November, just prior to the start of Ağbal’s brief term as governor.

"I don’t think many investors would disagree with this," Tim Ash, senior emerging markets strategist at BlueBay Asset Management, said in reaction to the IIF's revision.

"It reflects simply wrong monetary policy settings driven by Erdoğan’s ideological objections to orthodox monetary policy," he said in e-mailed comments. "Add in consequent high inflation, dollarisation and portfolio outflows, which makes it very difficult to finance a large current account deficit and big external debt rollovers."

Ağbal had won widespread praise from foreign investors and economists for raising interest rates, which had stood at 10.25 percent in October, and for pledging further monetary tightening if required to slow inflation towards a 5 percent goal.

The lira has also declined as banks continued to increase lending to the economy. A borrowing boom last year had widened the current account deficit to more than 5 percent of GDP by sucking in imports. That imbalance in the national accounts has increased selling pressure on the lira.  

(This story was updated with analyst comment in the eighth and ninth paragraphs.)