Waiting for the Emergency Action Plan….

As Fitch’s downgrading of Turkey’s debt rating on Friday has already affected the prices, no sharp fluctuations occurred in USD/TRY.

Everyone is curious to find out who will be assigned as committee members while impatiently waiting for the new cabinet’s working principles and emergency action plan. It looks like, in the new system, President and the Committees are to meet for making decisions which will be executed by the Ministers. My guess is that market fluctuations will slowly decrease as we learn further details about the emergency action plan and the committees of the cabinet.

Based on my synthesis of market actors’ and experts’ opinions, it is possible to speak on a number of scenarios. Two of these scenarios, however, stand out as the most probable ones:

According to the first and relatively more positive one, USD/TRY may continue to remain within an optimist band, which I forecasted to stand between 4.20 and 4.50 in my earlier reports but hit a level of 4.50-4.70 due to some negative effects. In this scenario, although inflation is expected to remain under control, it will not demonstrate a significant fall. Loan rates may be anticipated to stand at 25-30% until the year-end, bearing in mind CBRT’s next decision in this month’s meeting.

“What can help eliminate the Negative Scenario?”

The second scenario, on the other hand, is mostly expected to be dominated by the sharply fluctuating USD/TRY pair which will probably remain within a band of 4.70-5.15. Although this scenario does not strike me as too negative to me, it surely indicates a situation where loan rates will exceed above 30% with inflation going higher and higher.

That is to say, interest rates remaining below 25% do not seem possible even in the most positive scenario. As I have frequently mentioned in my previous reports, we may need to make sacrifices to keep up with other countries during the upcoming 3-year era of high interest rate-high inflation-high growth. For instance, the government may be expected to declare, “To continue to implement our structural reform agenda, we should not stop growth”.

Therefore, long-awaited reforms may be slowly implemented following a long-term agenda. On the other hand, capacity enhancing incentives may be considered for the manufacturing industry, along with other financial supports for the construction business. What I mean is that the government may choose a growth-focused approach in lieu of development-oriented strategies.

But I still have hope. I heard that Ankara has been working on a “development-focused growth model” for some time now. I’m really looking forward to seeing the result.