USD/TRY: Turkish lira will probably continue depreciation trend - Commerzbank

The Turkish lira has stabilized for now, notes Tatha Ghose, an analyst at Commerzbank, but they see USD/TRY at 5.25 by March 2019 and at 5.75 in December 2019.

Key Quotes: 

“There are four risk factors for the lira during 2019. 1) First, the macroeconomic situation will remain precarious for some more time: growth will be slow or negative because of the balance sheet effects of the 2018 crisis – we have not yet seen all the effects of the crisis on corporate debt, FX liabilities and balance sheet stress. Over the coming quarters, these effects are likely to come to the surface. This, in itself, can serve as a reminder to the FX market. But that is not all. 2) This is likely to result in government support  and bailout packages, as well as cheap lending schemes, which will amount to monetary easing via quantitative channels. 3) Third, pressure on CBT to lower rates outright will also be high – we see the policy rate being lowered to 15% by the end of 2019. 4) Finally, as growth begins to re-accelerate, we see Turkey’s long-term imbalances, for example the current-account deficit re-emerging next year.”

“We forecast a long-term weakening trend for the lira: we see USD-TRY returning to 6.00 levels by early 2020.”

“The Turkish economy recorded strong growth over the past couple of years; this momentum continued up to Q2 this year. But, growth slowed abruptly in Q3 as the lira crisis had its effect and most forecasters anticipate quarter-on-quarter GDP declines beginning Q3; some commentators forecast a hard-landing of the economy and ultimately resort to an IMF package.”

“The helpful effect from overall EM risk sentiment and from geo-politics may allow Turkey to muddle through next year. Our base case is for slow 1% growth next year but not an outright collapse.”