BY ALAATTIN AKTAS
Let’s estimate the FX rates in line with the alliance which will win the election on May 14…
The lira is highly devaluated in line with the CPI (Consumer Price Index)-indexed Real Effective Exchange Rate (REER). It is neither appreciated nor appreciated in line with the D-PPI (Domestic Producer Price)-indexed REER. Such a result may emerge only if our price indices don’t show the truth. You can also obtain different results based on the date. It isn’t also enough to see the real value of the lira by looking at this index alone. There is also the market reality. The FX rate hike expectation is highly dominant.
Will one of the two alliances win the two elections? Or will one alliance win the Presidential election and another alliance hold most of the seats in the Parliament? Or won’t the two alliances hold most of the Parliament? Will the Presidential election be completed in the first tour? All questions are signs that the uncertainty may not be over on May 14. But let’s assume that the alliance, which wins the Presidential election, will also hold most of the seats in the Parliament… Here are the questions and answers regarding the FX rate hike expectations:
>> What is the most important reason that pushes the hike in FX rates?
The FX rate supply doesn’t meet demand.
>> Why is the FX supply low?
Because there is almost no resource inflow from abroad.
>> Why is the demand high?
Because everyone expects the FX rate to surge. Moreover, the deposit interest rate was too low for some time. That’s why savers headed for FX to protect themselves from inflation. There is also a demand from companies, which need FX for imports, debt payment, and investment.
>> What should be done?
These factors should gradually be removed.
>> How?
The FX supply should be raised. The external source should be founded. The International Monetary Fund (IMF) shouldn’t be thought of immediately as Turkey doesn’t need it. The country can easily find FX if it restores the “factory settings”. A good Central Bank (CB) management is a must. The policy rate should not be set by politicians but by the CB.
>> Will it work?
If the CB brings the policy rate to an acceptable level, credibility will emerge. This will be more meaningful than the rate hike. Thus, the perception that the CB operates independently will emerge and become stronger in time. The demand for FX will decline or be broken when FX inflow starts and the perception that FX rates won’t rapidly increase will be established.
>> Which alliance will achieve it?
The answer is in the question.
>> How?
One of the alliances continuously says the current policy will maintain and the policy rate will be lowered further. The other alliance states that the CB will be independent, and the policies which assure investors, will be implemented.
>> Will foreign investors, who don’t like the current policies, don’t adopt them and consider them unreliable, change their minds, come to Turkey, and bring FX?
No.
>> Isn’t it obvious how to break the hike pressure on FX rates under these conditions?
Yes.
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