The Turkish lira is currently trading under its value but should return to a fair value position, financial expert Hung Q. Tran told Anadolu Agency on Friday.
"We put it [lira] in a very undervalued territory, so it's really undershooting what the fair fundamental value ought to be," said Hung Q. Tran, the executive managing director of the Washington-based Institute of International Finance.
The Turkish lira lost approximately 50 percent of its value against the U.S. dollar from the beginning of this year until Sunday, August 12 but strongly rebounded this week gaining almost 20 percent against the greenback as of Thursday night.
"At this point, the lira is sentiment driven in the market, it is not fundamentally driven," Tran said.
"Assuming that we are looking at one or two years ahead of time, I think the lira should correct the undershooting that we see now, and come back to some kind of more fundamentally justified fair value between $5 - $5.50," he added.
The recent turmoil between Turkey and the U.S. has also added to the sudden decline in the lira against the dollar last week.
"It [lira] was exacerbated briefly by the tensions with the U.S., and particularly the recently imposed sanctions against Turkish ministers. So all of these things combined together to undermine international investors, which is the key element for suspending the Turkish economy," Tran explained.
Turkey and the U.S. are currently experiencing rocky relations following Washington’s imposition of sanctions on Interior Minister Suleyman Soylu and Justice Minister Abdulhamit Gul for not releasing American pastor Andrew Brunson, who faces terrorism charges in Turkey.
U.S. President Donald Trump's decision to double tariffs on Turkey last Friday was another salvo in the growing dispute between the two NATO allies.
- Warning against Iran sanctions
Tran also warned that the U.S.' move to reimpose sanctions against Iran could be risky for Turkey, which imports significant amounts of oil and natural gas from its neighbor.
The U.S. State Department in June urged allies and companies to stop buying crude oil from Iran by Nov. 4 at the latest, and said they could face U.S. sanctions if they do not end oil imports from Iran.
"That means any country by that time still doing business with Iran, including energy trade and financial transactions, will be under U.S. sanctions," Tran said.
"Turkey has made it clear that they intend to continue, if not even deepening economic relations with Iran. That is a risk for other kinds of sanctions," he argued.
- Weak currency to shrink account deficit
Tran also stated that the weak lira at the moment would be helpful in shrinking the country's current account deficit.
"Cheaper currency will stimulate exports and discourage imports. The fact that the lira is cheap at the moment, fundamentally speaking, it will be helpful in reducing the current account deficit," he asserted.
"In order to put the Turkish economy on a path of sustainable growth in the future, policymakers have to do things to engineer a soft landing. They need to reduce the overheated growth rate to allow inflation to come down and to allow the current account deficit to shrink," he explained.
U.S.-based global investment banking and financial services firm Goldman Sachs said in a report Tuesday that Turkey’s current account deficit to GDP ratio was 7.0 percent in the first quarter of the year.
"The current account deficit year-to-date is running at around 6.5 percent of GDP on our estimates," the firm said.
"We expect the current account deficit to be around 5.0 percent of GDP in 2018 as gold imports normalize and the strength of the services trade balance continues," it added.
The company said that policymakers in the country prefer applying "a combination of monetary and fiscal measures".
Tran, in addition, stressed that Turkey needs to attract foreign capital inflow that is 25 percent of GDP every year in order to finance spending and investment because of the very low domestic savings rate in Turkey.
By Ovunc Kutlu in New York