Analysts at MUFG Bank, point out that COVID-19 disruption reinforces downside risks for the Turkish lira. They forecast USD/TRY at 7.00 by the second quarter and at 8.00 in a year. 

Key Quotes:

“The lira has weakened against the US dollar undermined by the deepening COVID19 shock which has triggered a sudden stop for emerging markets and record capital outflows. The lira has though held up relatively well so far. It has been helped by the second shock from the plunge in the price of oil which is a supportive development for Turkey’s trade and current balances. Turkey’s economy had entered this year on a strong footing after growth accelerated sharply to an annual rate of 6.0% in Q4. However, it is now likely to slow sharply in response to COVID-19 related disruption thereby increasing the risk of falling back into recession.”

“The government has closed schools, most restaurants, cafes and cultural events for at least three weeks. Turkey has a large tourism sector accounting for around 12% of GDP which will be hit hard. In an attempt to dampen the negative hit to the economy, the government has unveiled a TRY100 billion “Stability Shield”. The support measures include: i) loans guarantees to small and medium-sized enterprises via the credit guarantee fund, ii) allowing six-month tax deferrals, and iii) calling on banks to facilitate the flow of credit into the economy. The big state banks have agreed to postpone debt repayments by three months and to restructure company loans to give grace periods of up to one year.”

“The CBoT has also taken action to support growth through lowering the key policy rate by a further 100bps and announcing front-loaded outright purchases of government bonds. The programme’s limits will be revised depending on market conditions. In these circumstances, we expect the lira to weaken further.”

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