Turkey: Capital controls cannot be ruled out – Danske Bank

According to analysts from Danske Bank, Turkish President Erdogan needs to either tighten monetary policy or close its capital account through capital controls in order to stop the rally of USD/TRY. They think Erdogan will be persistent this time around and not easily persuaded, but there are some potential game-changers: pressure from business community, emerging signs of a bank run and the threat of a snap election.

Key Quotes: 

“With limited buffers, the CBRT’s recent interventions are nothing short of a sign of desperation and, hence, more likely to undermine their credibility rather than halt lira’s slide. More extreme measures, such as capital controls, cannot be ruled out.”

“For now, there are no signs of a policy reversal, and unless Erdogan is deterred by the threat of a bank run or a snap election, we think lower real rates, weakening fundamentals and tighter global financial conditions will drive lira further down.”

“Basically President Erdogan is trying to fight the “impossible trinity” which states that a small open economy like Turkey’s cannot run an independent monetary policy with an open capital account and also have a stable exchange rate. So unless Erdogan wants to see the USD/TRY keep rising (generating higher or even hyperinflation) Turkey needs to either tighten monetary policy i.e. abandon its independent monetary policy or close its capital account through capital controls (or implement price controls, which would lead to goods shortage in the economy).”