Tur-key'ed in on a long-term Lira recovery

Summary

Around the turn of this year, we formally expressed an outlook of long-term cautious optimism on the Turkish lira, a notable shift in view after years of pessimism. With local elections now in the past and a commitment to policy and economic orthodoxy intact, we are reiterating our long-term constructive view on the Turkish lira, but with an increased degree of conviction.

Turkish Lira has reached it's inflection point

“In Turkey, President Erdogan has appointed a technocratic team to decide economic and monetary policy. New cabinet members have delivered significant monetary tightening in an effort to contain inflation, a stark shift in monetary policy ideology from what President Erdogan had put in place prior to elections. A more orthodox stance on monetary policy has attracted foreign investors back to Turkish government bonds and has brought Turkish assets back onto investor radars. Up until now, the lira has not recovered as the implementation of technocratic policy needs to build a longer track record of success and “Erdogan risk” hovers over the currency; however, we do believe the lira is on the brink of a rebound in 2024. Turkey will host local elections in March 2024, and while the outcome is not particularly meaningful, President Erdogan's recent ability to relinquish monetary policy to central bankers will be tested pre- and post-election. In our view, the central bank will now maintain its independence leading into the election and after the election. Interest rates will remain high, inflation will gradually recede, sovereign credit rating upgrades will be delivered and the lira will begin its recovery, although likely along a rocky and non-linear path. In that sense, we now believe the Turkish lira will outright strengthen starting in Q2-2024 and lira strength will continue through early 2025. Conviction in this new lira outlook is not strong, however, and should the policy backdrop change, our view would snapback to forecasting lira depreciation.” — Wells Fargo International Economics 2024 Outlook.

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