British economic research company raises dollar forecast, announces election scenario in Turkey

The British economic research company Capital Economics has sharply raised its dollar/TL forecast for the end of 2022, as well as announced the election, interest rate and dollar scenario for 2023. Capital Economics, a London-based economic research and consulting firm, announced that they expected the recent appreciation losses in the TL to continue accelerating. In the analysis, the year-end forecast for the dollar/TL for 2022 was increased from 18 to 24, while the election scenario was also included.

The analysis, which estimated that the exchange rate could see 26 and above in the first half of 2023, also conveyed the scenario that the exchange rate would decline to 24 at the end of 2023 and to 20 at the end of 2024 if the opposition won the election in June 2023 and then aggressively increased interest rates.

CONDITIONS HAVE WORSENED

Noting that the Turkish LIRA has experienced a 15 percent depreciation against the dollar since the beginning of May, the study stressed that conditions had worsened and that they expected the depreciation to accelerate.

In the analysis which noted global financial conditions were tightening and external conditions were worsening for emerging markets, it was also said this situation created more pressure on the TL because Turkey’s external vulnerability was high.

ERDOGAN’S INSISTANCE ON INTEREST RATE

In the analysis the author reminded that Turkey continued to be under pressure, it was noted that Turkey continued to implement unconventional policies within the scope of the so-called “new economy model” despite the deterioration of the external environment, so internal conditions were decisive for the rapid depreciation in the TL.

The analysis, which recalled that President Erdoğan said that they would continue to make interest rate cuts last week, despite the current situation, included the expectation that inflation would remain at high levels and real interest rates would continue to remain in deep negative territory.

Despite the increase in the exchange rate, the real effective exchange rate has increased due to high inflation, which in turn weakens Turkey’s competitiveness and causes increased pressure on the current account balance, the analysis said, noting that a decrease in the real exchange rate might be needed to reverse this.

INCREASED RISK OF BANKRUPTCY

Noting that both worsening external conditions and the persistence of a new economic model have led to the fact that the risk of credit bankruptcy of Turkey has exceeded the levels of 2008, and increased geopolitical risks have also increased the risk premium, the author pointed to the conflict with the rest of NATO over the membership of Finland and Sweden and tensions with Greece.

The analysis also said, “We doubt that future policies will do much to stop the depreciation of the TL”, adding that tightening measures taken in recent days may help reduce demand somewhat and ease upward pressure on prices, but such measures lack effectiveness compared to traditional policy tools such as an interest rate increase.