WOOD Flash – Turkey macro: sentiment driving Lira back to fair value

Even with negative September BoP data, both the Lira and the CDS on government bonds have rallied significantly in the past few days, on the back of improved sentiment over the newly-appointed Central Bank of Turkey governor and Minister of Finance, and the supportive pro-market statements from president Erdogan. Even though the president has ruled out a cabinet reshuffle, the changes in the economic management team are significant and positive, in our view, given the technical background of the people selected. The date to watch now is 19 November, the upcoming MPC meeting, which should give us additional details on the CBT’s new stance. We expect the policy rate to be hiked by 500bps, but we do not change our outlook on the country just yet. First of all, we believe that the good execution of the actual implementation of the MTP framework, together with a more transparent and predictable monetary policy, would be a significant improvement in international credibility, without the need for a major overhaul. Regarding the currency, in our recent flash note, we highlighted that the Turkish Lira had hit the fair value level that our model predicted for 2021E – signalling that a stabilisation is likely going ahead. Currently, our model signals a fair value of 7.7 USD/TRY for 4Q20E, and we believe that an appreciation below this level would be short lived.