Prospects for Turkish Lira to recover to stronger levels are darkened by political uncertainty in the post July coup environment.
The ruling AKP party will submit the draft constitutional amendments on executive presidency to the parliament over the course of next week. Prime Minister Binali Yildirim said on Thursday that the negotiations with the nationalist MHP over the draft proposal have “matured” and that a referendum may be held “at start of summer.”
The Turkish Lira bounced off a fresh all-time low trading at up 0.34% against the US Dollar at 3.4850 during the morning trading session in London.
The USD/TRY exchange rate rallied to an all-time high on Thursday with most of the investment professionals expecting further declines for the Turkish lira during 2017 as the currency is seen a clear underdog in the investment universe.
“The Turkish lira is set to underperform, especially given its strong USD debt exposure, a problem exacerbated by the USD rally. Although President Erdogan remains firmly in charge, political risks may rise on the back of a planned referendum on executive presidency – likely due in April,” Royal Bank of Scotland analysts noted in the Global FX outlook for 2017 on Thursday.
Other banks including Morgan Stanley and BNP Paribas also expressed similar forecast for Turkish lira.
“We stick to a bearish stance on TRY. While the currency has weakened notably recently, we believe the currency is likely to underperform any back-up in US Treasury yields. Growth is continuing to slow with a wide external deficit, while fiscal metrics are expected to deteriorate slowly. Ongoing question marks the central bank`s independence will add to risk premium, as will persistent received political risk,” analysts from Morgan Stanley wrote in the Global Emerging Markets Outlook for 2017.
Since the beginning of November TRY fell more than 11% against the US Dollar spurring increased economic concerns about future political development in post-coup environment with president Recep Tayyip Erdogan worsening relationships with European Union and the emerging markets in general falling prey of investors’ flight to safety.
Even though the Turkish central bank stepped in last week with a surprise interest rate hike of 50 basis points, economists doubt that the monetary tightening is the right tool in halting the currency’s decline.
“Outside of developed markets policy uncertainty, there are a number of emerging markets political events that present a challenge to calm waters. Low ratings for the Korean president and elections in Argentina and Brazil are key risk events. Additionally, political risks are likely to persist in South Africa and Turkey which also bear watching,” analysts from Morgan reasoned further their expectations.
Completing a perfect storm, the international context is also stacked against the TRY, with the USD surging on the prospect of higher US interest rates and protectionism after the Donald Trump victory.
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