A fundamental force behind the growing pressure on the Turkish lira is the economy’s widening current account deficit. But in most cases, the Covid-19 crisis appears to be causing current account deficits to narrow, which is one factor that should limit the downside risks to EM currencies in the coming months. USD/TRY, which trades near the 7.38 zone, will trade at 7.50 by year-end, according to economists at Capital Economics.
Key quotes
“The widening of Turkey’s current account deficit this year helps to explain the growing pressure on the lira. While the deficit should narrow in the coming months as tourism revenues slowly return, the bigger picture is that the deficit will remain uncomfortably large. And combined with Turkey’s large short term external debts, this will keep the pressure on the lira.”
“We expect USD/TRY to trade at 7.50 by year-end but, if tensions with the EU and/or broader concerns about policymaking in Turkey escalate, the risk of much larger and sharper declines would grow.”
“Most EM current account deficits have narrowed this year. And external shortfalls are likely to remain smaller than pre-crisis levels even as economies return to full employment. Indeed, despite rebounding since March’s lows, currencies of traditional current account deficit countries like Brazil, Mexico and South Africa are still down by 15-25% year-to-date. All this limits the risk of further large currency falls – although further appreciation from here may be limited.”
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