Could the referendum alter the key macro themes?
Geoff Dennis, strategist, UBS
A “yes” vote may help to create the conditions for higher-quality capital-account flows and could support domestic demand by reducing domestic uncertainties. Over the medium-term, however, we believe structural economic reforms are needed to improve Turkey’s competitiveness and address structural deterioration in the balance of payments. The impact of a “no” vote (would have) likely resulted in much greater uncertainty, weighing on the lira and other asset classes, requiring further monetary tightening and creating downside risks to growth. Market pricing appeared skewed towards a “yes” vote, but not sufficiently so as to preclude a tactical short-term relief rally post the outcome. The lira is the worst-performing emerging-market currency year-to-date. We think the lira could appreciate a further 2 percent to 3 percent in the near term on this outcome. Longer term, low real rates, likely current-account deterioration amid an expanding credit impulse and limited competitiveness and a weaker capital-account financing structure keep us cautious on the lira, equities and local debt more structurally. (April 13)