Turkish lira may gain this year for first time since 2012 - Capital Economics

Turkey’s lira, which slid to successive record lows in 2020, may gain against the dollar this year for the first time since 2012, according to Capital Economics.

The lira could increase in value to 7 per dollar by the end of the year, said Jason Tuvey, senior emerging markets economist at the London-based research and consultancy firm, in an e-mailed report. It traded at around 7.44 per dollar on Wednesday.

Tuvey said that the lira’s value is being supported by central bank interest rate hikes and monetary policymakers are expected to keep borrowing costs high this year to deal with inflation. The central bank has raised its benchmark rate to 17 percent from 8.25 percent four months ago.

“There remain significant downside risks facing the currency, but we think that 2021 could be a rare positive year for the lira,” he said.

The outlook for the currency has also become rosier because politicians in the governing Justice and Development Party (AKP) had become increasingly concerned that lax economic policies under President Recep Tayyip Erdoğan had led to an erosion in the party’s support after inflation accelerated and the lira slumped, Tuvey said.

Turkey’s current account deficit, which widened sharply last year, is expected to narrow in 2021 despite higher oil prices, he said. Exports will be helped by a pickup in external demand due to the roll out of COVID-19 vaccines and, crucially for Turkey, there will be a steady recovery in international tourism, he said.

“At the same time, the recent tightening of monetary conditions and sharp slowdown in credit growth will take the steam out of import growth,” Tuvey said.