Turkish Lira Sees Volatility as Bank of America Predicts Further Depreciation Against USD

In recent years, Turkey's economy has been facing significant challenges, with concerns over the stability of the Turkish lira and its impact on economic growth. Despite efforts by the government and the central bank to stabilize the currency, it has experienced sharp fluctuations, including a 44% decline against the US dollar in 2021 and a nearly 30% decline in 2022.

One initiative that has been introduced to help protect the Turkish lira from depreciation is the ability for Turkish companies facing forex payments to open lira accounts without needing to convert foreign exchange. This announcement, outlined in the country's Official Gazette, has been seen as a positive step towards stabilizing the currency and protecting businesses from economic uncertainty.

However, analysts from Bank of America Corp. have warned that regardless of who wins the upcoming election in May, the Turkish lira is expected to weaken. If the opposition party wins, there may be big swings in the market until the new government announces a new economic framework and fills key posts in the administration. If President Recep Tayyip Erdogan’s administration holds on to power, the lira may experience a disorderly depreciation.

To address these challenges, Bank of America analysts suggest that significant changes are necessary to re-balance the economy, including substantial cuts to non-earthquake spending and a depreciation of 15-25% in the lira. They also predict that the country’s key policy rate could reach as high as 50%, up from a current 8.5%, and the 10-year lira bond yield could peak at 30%, triple the current level.

The central bank's interventions to prop up the market have come at a steep cost, with Bloomberg Economics estimating that the back-door currency-market operations have cost about $128 billion since December 2021. The bank's net foreign-exchange position is negative when liabilities are accounted for, and Turkey's current-account deficit surged to $9.85 billion in January, the steepest on record.

Despite the challenges facing Turkey's economy, initiatives such as the ability for Turkish companies to open lira accounts without converting foreign exchange demonstrate a commitment to stabilizing the currency and protecting businesses from economic uncertainty. It remains to be seen how the upcoming election and potential changes to economic policy will impact the economy in the long term.