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IIF cautious on Turkey’s lira amid possible devaluation

REUTERS/Osman Orsal
The Turkish central bank's net international reserves rose to $35.81 billion in the week to November 24, hitting its highest since March 2020

The Institute of International Finance (IIF) has doubled down on its bullish view of the Brazilian currency while taking a cautious stance on the market’s pessimism towards Turkey’s lira.

The IIF said in a report ahead of its currency fair value update that “market sentiment in both cases is more bearish than we are”.

On Brazil’s real, the IIF held its $4.50 per dollar view – a level the currency has not touched since before the pandemic lock-downs hit the global economy in early 2020, though it brushed against it a year go.

The real was trading on Thursday near five per US dollar, up over five percent on a year-to-date basis and among the strongest emerging market currencies in 2023.

Underpinning the call for a further 11 percent strengthening is their view of Brazil “rapidly becoming a trade surplus country, powered by agricultural exports”, the IIF said.

On Turkey, a deep current account deficit has fed into the market view of a weaker fair value for the currency, which sits at about 19.4 per dollar and has lost just over three percent of its value this year – and almost 70 percent since the start of 2020.

But upcoming presidential elections may determine whether economic policy shifts toward a more orthodox view, including the need for higher interest rates.

“Markets turned very negative on Turkish lira in the run-up to next month’s elections and most expect lira devaluation far in excess of our 21 (per dollar) fair value,” they wrote in the report.

“This pessimism is understandable given the rapid widening in the current account deficit and the underlying drivers of that widening.”

But the IIF called the market’s pessimism “excessive” as the election “could set the stage for an end to Turkey’s credit-based growth model”.

Turkish President Tayyip Erdogan has focused on reducing the current account deficit, which stood at $48.8 billion last year and moved past $18 billion in February. Turkey’s central government budget recorded a deficit of $2.46 billion in March.

Separately, William Jackson, chief emerging markets economist at Capital Economics, said the upcoming election in Turkey “may make it harder to attract foreign funding” adding that “inflows into Turkey remain muted, forcing the central bank to sell its (worryingly small) reserves to finance the external shortfall” and a large currency decline “could lie in store”.