Turkish lira to remain overvalued despite fall in oil prices

The latest estimates by the Peterson Institute for International Economics in October suggested that the Turkish lira remains one of the most “fundamentally” overvalued emerging market currencies that we track. This is due to Turkey’s substantial current account deficit which, despite falling over the past year, was still the equivalent of 6.5% of GDP in Q2 2014. Admittedly, the lira’s degree of overvaluation on this metric has fallen since the previous estimate in May and the recent sharp fall in oil prices should reduce Turkey’s current account deficit further, given that it is a net oil importer. However, even with lower oil prices, Turkey’s current account deficit is likely to remain large over the coming years for structural reasons. (See our Emerging Europe service for more.)