Turkey | Why the lira scheme may do more harm than good

Turkey’s unpredictable macro policies could leave the treasury with a sizeable bill stemming from FX-protected lira deposits. The baseline for public finances, however, remains benign for now; they compare favourably with most emerging markets (EMs).

What you will learn:

• That said, the political environment promotes volatility. While the central bank (CBRT) has paused to evaluate the impact of the steep rate cuts delivered in H2 2021, more cuts may be in the offing, even as fundamentals support rate hikes.
• Meanwhile, lira stability is wobbling under the strain of inflation, which is primed to push real rates into more negative territory from the current -22%.
• And room for further currency intervention is limited: Defending the lira has depleted foreign reserves, costing at least $7.3bn in direct intervention in December and leaving international net reserves close to a two-decade low.