Turkish lira undershooting fair value: global banking group

WASHINGTON (Reuters) - The Turkish lira is significantly below fair value at the moment and should strengthen over the next one to two years as Turkey's economy slows and exports gain strength, improving the country's balance of payments outlook, economists for the Institute of International Finance said on Wednesday.

Speaking on a media conference call about market turbulence in Turkey and other emerging markets, IIF chief economist Robin Brooks said that fair value for the Turkish lira, based on macroeconomic fundamentals, "is somewhere around 5 to 5.50" to the dollar.

The lira was trading around 6.05 to the dollar on Wednesday after hitting a low of 7.24 on Monday amid market concerns about a high current account deficit, President Recep Tayyip Erdogan's opposition to higher interest rates and a widening trade dispute with the United States.

"On the fundamentals, the underlying forces for the Turkish lira are quite positive," Brooks said. "We are working on an analysis that shows that the current account is on a significantly improving track, not just because the economy is contracting, but also because the currency is so cheap that exports will get a meaningful boost in terms of export volumes, so I expect on a one-to-two year horizon, for the Turkish lira to be significantly stronger."

While much of Turkey's currency drop is due to "idiosyncratic" factors in Turkey, such as a major runup in credit that has fueled unusually strong growth, Brooks said there was potential for contagion in the form of capital outflows from some other major emerging markets, including Argentina, South Africa, Indonesia, Egypt and Lebanon.

"We think those capital flows are quite indicative of contagion potential," he said, adding that because the U.S. economic cycle is quite old, more funds have flowed into emerging markets that are "further afield" in search of higher returns.

The IIF, which represents major financial institutions from around the world, had turned cautious on emerging markets earlier this year, when Argentina's peso began experiencing weakness that later led to an International Monetary Fund credit line for the country.

(Reporting by David Lawder in Washington; Editing by Chizu Nomiyama and Matthew Lewis)