October 21, 2010 / 4:56 PM / 9 years ago

Robust Turkish recovery to slow lira depreciation

By Andy Bruce and Alexandra Hudson

A Palestinian child holds a Turkish flag during a protest against Jewish settlement activity in Sheikh Jarrah neighbourhood in East Jerusalem June 4, 2010. REUTERS/Baz Ratner

LONDON/ISTANBUL (Reuters) - Turkey’s lira currency will depreciate over the next year at a far slower rate than expected six months ago, according to a Reuters poll of analysts who saw a slowing but robust economic recovery.

Surging capital flows pushed the lira to a two-year high against the dollar last week, as high-yielding emerging markets benefited from expectations the United States will soon resume pumping cash into markets by purchasing Treasury debt.

Few analysts in the last poll in March accurately forecast the extent of the lira’s appreciation to around 1.427 against the dollar now, a rally coinciding with a strong economic recovery after a contraction of almost 5 percent in 2009.

The latest survey of around 30 analysts showed the lira weakening modestly to 1.45 in three months, 1.47 in six months and 1.50 in a year’s time.

While Turkish economic growth will slow in 2011 in tandem with major Western export markets, forecasters expect the lira to hold its value well despite uncertainty about vast budget austerity measures in European Union states.

“Once risk aversion dissipates, the lira should re-appreciate, supported by rather robust growth momentum, higher interest rates and investors’ appetite for large emerging markets,” said Guilliame Tresca of Credit Agricole-CIB.

Having underperformed emerging market peers last year, the Turkish economy should expand by around 7.3 percent this year, the poll showed — a sizeable upgrade from the 4.1 percent forecast in March.

The government forecasts economic growth of 6.8 percent this year, among the fastest rates in the world.

The poll showed the Turkish economy expanding around 4.3 percent next year and 4.5 percent in 2012 — still below the high single-digit rates seen in the years before the global financial crisis and ensuing Great Recession.

RECOVERY CONTINUES

Recent economic data have been surprisingly strong, with August industrial output posting a monthly rise 2.7 percent, well above forecasts.

“The August industrial output showed that the economic recovery continues unlike the impression of the preceding months’ figures,” said Nilufer Sezgin at Fortis.

Markets welcomed the 2011 budget presentation earlier this month in which the government raised growth forecasts and cut its budget deficit projections, reassuring those who had feared it might spend more ahead of next year’s election.

Inflation, for decades a scourge of Turkish policymakers, should average between a low of 5.6 percent and a high of 7.7 percent from now until at least the second half of 2012, according to the poll.

Still, for 2010 as a whole economists predicted inflation of 8.1 percent — some way above the central bank’s year-end target of 6.5 percent. It’s expected to slow to 6.8 percent in 2011 and then 6.1 percent in 2012.

The central bank is expected to leave its policy rate on hold an 7.0 percent until the second quarter of next year, when it is seen rising to 7.5 percent. The median forecast from analysts showed it would rise to 8.0 percent by the end of 2011. (Polling by Bangalore Polling Unit and Istanbul Bureau, Analysis by Ruby Cherian, Editing by Ross Finley and Hugh Lawson)

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