Morgan Stanley renews electoral scenarios and the dollar

Morgan Stanley updated the views in its February 3 report by publishing a report containing its post-election scenarios.

While bank economists shared their post-election dollar/TL analysis, experts predicted a rise in dollar/TL regardless of who wins the election.

In the report written by a group of economists including Hande Küçük, Alina Slyusarchuk and James K Lord, it is stated that Morgan Stanley experts exchanged various views in Turkey.

While bank officials met with local experts, politicians and economists in Ankara and Istanbul, some views were updated in the report after these meetings.

“If there is a change in the policy framework after the elections, the LT will probably face a quicker correction than we expected. In the case of policy continuity, a currency correction may be inevitable.

Here are 3 different scenarios written by experts:

SCENARIO 1: THE ALLIANCE OF THE REPUBLIC WINS THE ELECTIONS

AKP officials are working on an election manifesto that is likely to be published in mid-April. This study will include an economic program that aims to eliminate imbalances due to inflation and current account deficits, focuses on structural reforms, and maintains its focus on growth and employment. In this scenario where there is no political change, we do not see a return to traditional politics.

Depending on money inflows from regional partners like Russia and the Gulf countries, regulatory action, and active reserve management, the initial currency correction may be more limited. The situation may continue until the third quarter, but we expect to see a more pronounced depreciation of the dollar/TL towards the end of the year.

This, in turn, can trigger a partial policy rate reversal. This scenario will likely lead to an upward movement in inflation and a recession in 2024 until a new macro policy framework comes into force.

SCENARIO 2: THE NATIONAL ALLIANCE WINS

Potential opposition policymakers are focusing immediately after the election to minimize potential market disruptions until a new macro policy framework comes into force.

Ahead of the elections, work is underway on the leadership structure with the names and teams likely to play a role in the main economic and financial policy institutions such as the Treasury, the CBRT, the BRSA and the SPK.

In this scenario, it is likely that the exchange rate will be pushed up until the inflow of foreign currency resumes.

A large currency correction could mean a higher starting point for inflation and require a larger update in policy rates. This increases the risk of a tougher recession.

Given that headline inflation is around 45 percent and expectations for the next 12 months are around 32 percent, we anticipate the initial policy rate to move to 30-35 percent. In such a scenario, we see interest rates rising to 40-45% by the end of the year.

In 2024, we expect a significant drop in inflation and a relatively quick recovery after a three-quarter recession.

SCENARIO 3: POLITICAL UNCERTAINTY

We previously framed this third scenario as a split result, with President Recep Tayyip Erdoğan retaining the presidency but losing his majority in parliament. We believe this is unlikely at this time.

We are reconstructing this situation as a scenario that may require a possible re-election. In such a situation, increased political uncertainty can lead to a large change in the currency and cause erratic movement.