Turkey: What can stop the TRY from bleeding? – Nordea Markets

According to analysts at Nordea Markets, Turkey’s central bank has two options to prevent the TRY from bleeding: It can either deliver an aggressive emergency hike or impose capital controls (FX interventions not possible as discussed above). 

Key Quotes

“None of these options looks favourable in the eyes of Erdogan. First, Erdogan has said that the high interest rates are the reasons for the high inflation, and that higher interest rates will not help the TRY. Instead, he believes the TRY crisis is due to a foreign plot.”

“The other option of using capital controls (preventing dollarisation) is not a desired option either as it can destroy the rest of the investor confidence and will lead to a sharp decrease in growth.”

“As Erdogan’s entire economic agenda is built on high growth, and Erdogan furthermore has highly dismissed capital controls during other crisises (eg. following the coup attempt in 2016), this looks like a measure of last resort.”

“At the end, an emergency hike looks like the most likely (and easiest) option. We believe that a move above 200 bp is needed to stop the TRY from bleeding more today.”

“Longer out on the horizon, we believe there are four things that needs to be fulfilled for the TRY to stabilize. First of all, we need to see definite evidence that the central bank can act independently and economic policy in the country overall is rational. Second, Turkey needs to change its aggressive stance towards the outside world (US, EU, Israel, Syria, Greece, etc). Third, the government needs to show the markets that it can execute the recently presented fiscal consolidation plan of 2019  by in particular running a primary balance surplus and decreasing the current account deficit (note that we find the recent rumours of involvement with IMF very unlikely due to both domestic politics as well as geopolitical tentions with the US). Finally, we probably need to see somewhat easier global liquidity conditions, although this might prove difficult as the Fed keeps hiking and normalising its balance sheet. At the very least, a stabilization of the TRY is dependent on the USD not rapidly increasing.”

“Overall, we think that Erdogan needs to act now if he does not want Turkey to develop into a mini-Venezuela (worst case scenario). Growth will take a significant hit no matter what, so the important thing now is to do some damage control and stabilize the lira.”