The business cycle

TURKEY: Better than total chaos, but…

By September 28, 2018 No Comments

The equity market has recently rallied, but remains down by 13.29% since the beginning of the year. We think this rally will prove to be short lived because market valuations do not yet reflect the likely slower economic performance in the next three years and the still meaningful currency depreciation risks.

The currency has recovered to 6.02 from a high of 7.23 on August 13th. We think this recovery reflects the measures announced that reduce the risk of a worst case scenario that would have involved severe financial instability and limited capacity of rolling external debt. However, we think this rally will be short lived as in order to balance the current account the lira needs to be closer to 7 to the USD, which appears to us a more sustainable medium term level given the downturn in global activity ahead and the worsened geopolitical backdrop.

  • September data show a sharp drop, comparable to 2008
  • Fiscal consolidation of c.2% of GDP is a good first step
  • Monetary policy was tightened in September; we expect an easing in 1H19E
  • Modest evidence of EU political support for Turkey should help rolling external debt
  • Current account deficit is beginning to consolidate, adjustment should be evident in 1Q19E
  • TRY maintains a depreciation bias, in our view, also due to deteriorating global condition