Goldman Sachs indicated that the volatility of the Turkish lira increased significantly in the second half of March 2019. It noted that the 6.7% depreciation of the lira against the dollar on March 22 was triggered by a decline in the Central Bank's foreign currency reserves, as well as by weak European growth data, given the large share of Turkish exports to Europe. But it said that the lira recovered some of its losses to trade at around TRY5.48 against the dollar on April 1, 2019. It considered that the reasons for the currency's volatility differ significantly from the factors that led to the depreciation of the lira in August and September 2018. It said that an overheating Turkish economy in early 2018, a wide current account deficit and the large external funding needs of the banking system exposed the economy to significant external risks last year. In comparison, it noted that the Turkish economy is currently operating below its potential, while the current account is balanced. As such, it considered that the renewed lira volatility towards the end of March 2019 was caused by a loss of confidence in the currency and by uncertainties about the authorities' ability or willingness to preserve its value, rather than by concerns about Turkey's external financing needs. Further, Goldman Sachs projected Turkey's real GDP to contract by 2.5% in 2019 and for the current account to post a surplus of 1.5% of GDP this year. It also expected the annual inflation rate to decline faster than anticipated to 12% by the end of 2019, in case of a gradual depreciation of the lira.
Source: Goldman Sachs