Wells Fargo economist Brendan McKenna has released a report on the upcoming general and presidential elections in Turkey, outlining three possible scenarios. According to the report, the opposition alliance has promised to transition from the current presidential system to a parliamentary system, return to traditional monetary policies, and ensure the independence of the central bank. However, McKenna does not see the scenario where Kılıçdaroğlu wins as the most likely outcome.
“Erdoğan’s departure would bring more orthodox policies”
The report suggests that if Kılıçdaroğlu wins, there will be a “sharp and significant rally” in the Turkish lira, as investors expect the country’s central bank to adopt a more orthodox interest rate setting regime. McCenna says: “If the Turkish lira regains its central bank independence and an orthodox monetary policy framework is implemented, it could experience one of the largest rallies in its modern history.”
“If the interest rate regime changes, the exchange rate will drop to 15 in 2023 and 14 in 2024”
If the interest rate regime changes, according to McCenna, the Turkish lira will appreciate by 20% until the end of the second quarter of 2023. In the long term, the report suggests that the Turkish lira could continue to appreciate with the expectation that the Central Bank of Turkey will implement tight monetary policy and transition to a positive real interest rate.
After the regime change, it is expected that there will be an increase in capital inflows to assets denominated in Turkish lira, which is why the USD/TRY is expected to trade at 15 in 2023 and 14 in mid-2024.
The report states that Turkey is a good example of how politics can affect economic prosperity and finance. “The absence of central bank independence due to President Erdoğan’s influence, growth-focused economic policies, and unconventional monetary policy has led to a continuous and large-scale depreciation of the Turkish lira. This has also increased the national financing cost, resulting in high inflation, decreased purchasing power of households, and low growth. Turkey is not the only country where politics has brought it down, but the upcoming general and presidential elections could lead to dramatic changes in Turkey’s economic outlook,” the report said.
“The possibility of a regime change is increasing”
According to the report, the “basic scenario” is based on President Erdoğan’s re-election, and Wells Fargo economist McCenna believes that “despite the new problems caused by economic difficulties and earthquakes, we think that Erdoğan can obtain sufficient support with financial support. Financial support can provide an optimistic outlook for the long term. However, we also think that there is a decrease in the likelihood of this scenario coming true and an increase in the possibility of a regime change.”
It seems that analysts are predicting that if Erdogan wins the election, the exchange rate of the Turkish Lira to the US Dollar could remain stable around 19 through interventions in the foreign exchange market until the end of the second quarter of 2023. However, in the long term, they predict that the Turkish Lira could continue to lose value, leading to an increase in the exchange rate to 19.5 by the end of 2023 and possibly up to 20 by mid-2024 if there are no changes in foreign exchange reserves and monetary policy.
