LONDON (Reuters) - Goldman Sachs (NYSE:GS) revised its Turkish lira forecast in the wake of President Tayyip Erdogan't cabinet revamp, saying it now expected the currency to weaken to 28 to the dollar in 12 months compared with a previous prediction of 22.
Erdogan signalled on Saturday his newly-elected government would return to more orthodox economic policies when he named Mehmet Simsek to his cabinet to tackle Turkey's cost-of-living crisis and other strains.
"We think it is a question of when rather than if the currency weakens significantly, with the probability of a larger one-off adjustment having increased," analysts at the Wall Street bank said in a note published after Erdogan announced his new top team.
"We believe the choice of Mehmet Simsek as the new treasury and finance minister increases the likelihood that monetary policy will shift towards a more orthodox direction."
The bank said it expected the lira to weaken to 23.00, 25.00 and 28.00 to the dollar in three, six and 12 months respectively. This compared to a previous forecast of 19.00, 21.00 and 22.00 respectively.
Depending on events, the 28.00 to the dollar level could be reached in less than a year, the analysts said. Equally, a larger-than-expected rate adjustment could mean that the Lira may need to weaken by less than forecast, they added.
The lira has lost more than 90% of its value over the past decade, with the economy in the grip of boom-and-bust cycles and rampant bouts of inflation which ran at more than 40% in April while the key interest rate currently stands at 8.5%