Capital controls cannot be ruled out – Danske Bank

According to Danske Bank analysts, Turkish President Erdogan must either tighten his monetary policy or close his capital account through capital controls in order to stop the rise in the USD / TRY. They believe Erdogan will be persistent this time around and will not be easily persuaded, but there are potential drivers of change: pressure from the business community, emerging signs of a bank panic, and the threat of early elections. .

Key quotes:

“With limited buffers, recent CBRT interventions are nothing less than a sign of desperation and, as a result, are more likely to undermine their credibility than to stop the read’s fall. More extreme measures, such as capital controls, cannot be ruled out. “

“As of yet, there is no sign of a policy reversal, and unless Erdogan is deterred by the threat of a bank run or snap elections, we believe the cut in real rates , weakening fundamentals and tighter global financial conditions will push the pound further down. “

“Basically, President Erdogan is trying to fight the ‘impossible trinity’ which states that a small open economy like Turkey’s cannot conduct 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 continue to rise (generating a rise or even hyperinflation), Turkey must either tighten its monetary policy, i.e. abandon its independent monetary policy, either close its capital account through capital controls (or implement price controls, which would lead to shortage of goods in the economy).

Sharon P. Juarez