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“Turkey’s worst currency crisis since 2001 is unfolding, driven by fears of further US measures and growing external vulnerabilities both at the sovereign and banking-sector level,” Standard Chartered analysts note.

Key quotes

“In line with our expectations, Turkey has proved the most vulnerable emerging market (EM) to changing global risk sentiment. Much of its weakness is idiosyncratic, compounded by reliance on external funding. This is important as concerns spread beyond its borders to both emerging and developed markets (DMs). The Financial Times reports that the European Central Bank’s supervisory wing is looking closely at European lenders’ links with Turkey. An economic adviser to Donald Trump has urged Turkey to put forward a clear plan to contain the currency crisis.”

“Against this volatile backdrop and as the crisis unfolds, we consider (1) bilateral trade between the US and Turkey; (2) banking-sector pressure points; and (3) the risk of capital controls being imposed given Turkey’s external funding requirements to finance the current account (C/A) deficit. We think banking-sector pressure points and monetary policy are the key elements to watch.”

“On the policy front, we think there needs to be a repo rate hike of at least 3ppts, possibly more, in conjunction with other measures. Our rate forecasts are under review. We think the best-case scenario would be a coordinated approach to mitigate banking-sector risks, reiterate the central bank’s (CBRT’s) commitment to tight monetary policy, as well as tightening the fiscal stance via a medium-term consolidation programme.  We note that any integrated plan will be geared towards short-term relief, and that underlying fundamental weaknesses will likely remain.”