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“Turkey’s incomplete policy response to the lira’s depreciation is unlikely on its own to sustainably stabilise the currency and the economy,” Fitch Ratings wrote in a recently published report.

Key quotes

“Efforts to fill the initial policy vacuum have helped stabilise the lira, as has a pledge from Qatar to invest USD15 billion in Turkey, although details and timing of the investment have not been disclosed.”

“Albayrak ruled out capital controls on Thursday, and we do not believe these are likely as Turkey needs to attract large capital inflows.”  

“The abrupt tightening in financial conditions will sharpen the slowdown in GDP growth already under way. A slowdown from 2017’s unsustainable 7.4% growth and some depreciation of the real exchange rate were inevitable to reduce imbalances.”

“Markets appear to believe that only a further increase in the main policy interest rate (which has already been raised by 500bp since April) would establish a sufficient real rate reflective of the risk premium, demonstrate policy credibility, support disinflation, re-establish a nominal anchor and attract capital inflows.”  

“The absence of an orthodox monetary policy response to the lira’s fall, and the rhetoric of the Turkish authorities have increased the difficulty of restoring economic stability and sustainability.”