3 different election and dollar scenarios for Turkey from Morgan Stanley

US investment bank Morgan Stanley has published a report containing possible scenarios for the planned elections in Turkey in May.

In scenarios drawn up by economists such as Hande Küçük and Alina Slyusarchuk, the bank predicted a gradual depreciation of the lira, continued low interest rates and increased regulation in the event of a final victory for President Recep Tayyip Erdoğan.

In case of victory of the opposition, the expectation is that the norms will be repealed, the independence of the Central Bank will be reinforced and interest rates will be raised sharply.

In the scenario where Erdogan won the presidency and the opposition won parliament, uncertainty and volatility in the exchange rate were forecast to increase.

Here are the bank’s dollar and inflation scenarios for possible outcomes:

SCENARIO 1: ERDOGAN’S VICTORY

What will happen if President Erdogan is re-elected and the Popular Alliance has an absolute majority in parliament?

The low interest preference continues. More confidence in unconventional tools and regulations. More than macro adjustment can be done after the selection of exchange rates.

Regulatory controls and active reserve management may allow for a gradual adjustment of the currency, depending on the persistence of inflows. There is persistently high inflation and below-average growth.

In this scenario, the annual inflation forecast for 2024 is around 35-40 percent. TL depreciation in 2023 is at the 20 percent level. The year-end forecast for USD/TL is around 23-24.

SCENARIO 2: CHANCE WIN

What will happen if the joint National Alliance candidate wins the presidency and the National Alliance obtains an absolute majority in parliament:

Politics will be reversed, aiming for stability. A return to traditional policies and greater central bank independence are inevitable in this scenario. The regulations will be phased out.

The policy rate will rise significantly as part of a comprehensive macroeconomic stabilization program. There will be a contraction in demand and greater inflows of foreigners. In 2024, there will be a significant decrease in inflation.

After a three-quarter recession, there will be a rapid recovery in 2024. In this scenario, the annual inflation forecast for 2024 is 15-20 percent.

In this scenario, USD/TL is expected to first decline and then gradually increase over the remainder of the year, while USD/TL is expected to close the year in 20-21.

SCENARIO 3: SPLIT RESULT

What will happen if the current president Erdogan is re-elected only if the Popular Alliance does not achieve an absolute majority in parliament?

Uncertainty about the policy framework will increase. Regulations will remain largely unchanged due to increased political uncertainty. The policy rate may change with some adjustment to a compromise solution. This can cause great volatility in the currency.

Initially, there will be higher inflation and a sharper recession. If a macro policy framework cannot be agreed upon, elections can again be made possible.

In this scenario, the dollar/TL can close the year around 25.

INVESTING IN STOCKS HAS BEEN HARD

Finally, it was stated in the report that the TL is likely to depreciate in any scenario in the medium term, but that traditional policies will have a more positive impact.

It was stated that the different results will also affect the performance of the shares, making it difficult to invest in shares in the long term.