Morgan Stanley Sees Turkish Lira Collapsing as Net Reserves Turn Negative

A week ago, when the Turkish lira first fell below 20 against the US dollar more pain was in stocks based on a dire analysis by Goldman of the central bank's reserve position.

Reuters reported that the net foreign exchange reserves of the Turkish Central Bank fell into negative territory for the first time since 2002, reaching -151.3 million dollars on May 19, as the bank rushed to meet the demand for hard currencies (dollars, gold, and cryptocurrencies) before the run-off on Sunday.

Demand for forex in Turkiye rose to record levels before May 14 due to the expectations of companies and individuals that the lira, which lost 44% in 2021 and 30% in 2022, will decline after the vote.

Central Bank foreign exchange reserves have declined in recent years due to costly market interventions and other efforts to cool foreign exchange demand.

The bank's net reserves fell by $2.48 billion in the week ending May 19, to the lowest level since February 2002.

According to Morgan Stanley strategist Hande Kucic, in the absence of conventional monetary tightening, which clearly won't happen in a world of Erdoganomics where lower rates are somehow expected to lead to lower inflation and where Turkish President Recep Tayyip Erdogan won't allow higher rates even if it means crushing hyperinflation.

Morgan Stanley's conclusion is that although the bank's pre-election scenario note stated that USD/TRY could hit 26 by the end of the year and in a loaded fashion again “the risk is that this level is reached sooner, with a higher USD/TRY level by the end of the year, closer to 28, absent a change in policy direction, particularly on interest rates."

"Without a change in the macro policy framework to prioritize disinflation and to adopt market-friendly policies, Turkey's high external finance needs will likely keep macro risks alive, increasing sensitivity to global shocks (commodity prices, Fed) as well as the availability of FX inflows from regional partners."

With hyperinflation rampant, and Erdogan not having foreign currency reserves to sell, along with gold, he will likely seek to plunder it for himself as he slowly but surely prepares to leave for a country that is not being delivered.