Precarious

Dünya Executive - - REPORT - Marek Drimal, strategist, SocGen

The lira continues to come under pressure and is close to breaching

6.0. The surprising­ly less hawkish tone by the CBRT at its recent policy meeting (removing the phrase “if needed, further monetary tightening will be delivered”, and replacing it with “monetary stance will be determined to keep inflation in line with the targeted path”) could add fuel to the fire. We revise our long-held bearish forecasts on the TRY for Q2’19, Q3’19, Q4’19 and Q1’20 to 6.30, 6.40, 6.50, 6.60 from 5.80, 5.90. 6.0, and 6.2 previously. The lira’s high volatility and potential of abrupt price gaps render a point estimate as simply a guide for the future. Risks of a larger depreciati­on greatly exceed those of lira’s appreciati­on until policy is properly reoriented. The slow and steady depreciati­on in the past few weeks, amid a benign external backdrop, is worrisome. Official policy support is unsustaina­ble, leaving the lira at the mercy of market forces and with short exposure probably small and the underlying desire of locals to move more lira into FX deposits, there is further FX depreciati­on in the cards. Macroecono­mic fundamenta­ls, external financing, increasing foreign exchange deposits, and concerns about financial stability can keep downward pressure on the lira, especially if the dollar is gaining against the rest of

EM. The bright spot is that to some extent policymake­rs control their own destiny and the right choices on fiscal, monetary, and corporate sector debt restructur­ing could help stabilize local and foreign sentiment. We expect the lira will continue to drop sharply in 2Q19 and probably reach

6.3. Markets might interpret the 25

April CBRT statement as a preparatio­n for monetary policy easing. While the wording of the Statement actually doesn’t exclude higher rates, the removal of the outright tightening pledge is concerning. Due to the weakening of the lira and higher oil prices (Brent has increased by almost 20 percent in TRY terms so far in April), inflation is likely to stay near 20 percent yoy longer than previously expected, probably into the summer. (April 26)

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