The IMF said on Tuesday that Turkey has not indicated that it is contemplating a request for financial assistance, which in itself is worrying.
Capital controls are now a distinct possibility, Bloomberg reports, citing financial market sources. This could be a real problem for the Turkish economy, which is heavily reliant on short-term capital inflows and has limited foreign exchange reserves.
Since January, the Turkish lira has lost 40% of its value against the US dollar and 10-year sovereign bonds fetch a yield that hovers in the region of 18-to-20%. The devaluation is likely to continue, most analysts predict.
The record 20% yields were reached on Monday and it’s an all-time high.
Currency devaluation adds pressure on both private and sovereign debt. Debt denominated in reserves currencies, most prominently dollars, amounts to over 50% of Turkey’s GDP, according to the IMF.
The Turkish depreciating currency adds to inflationary pressure; which was at a whopping 16% in July. Interest rates in Turkey are currently at 17.75%, while President Recep Tayyip Erdogan is showing an increasing appetite to intervene in monetary policy. The result is a collapse in market confidence.
Meanwhile, US economic sanctions are adding pressure on the economy. Washington demands the release of an Evangelical pastor, Andrew Branson, detained in Turkey in October 2016 on suspicion of espionage. Turkey’s deputy foreign minister, Sedat Onal, is said to be planning a delegation to Washington to address the conflict.