page banner image

PGIM Fixed Income explores how a monetary and political crisis risks unleashing a full-blown run on Turkish banks

August 17, 2018

A dramatic sell-off has made the Turkish lira cheaper on an inflation-adjusted basis than it has been since the 1990s, but there are good reasons to avoid exposure to Turkish markets until an orthodox policy response from the government is forthcoming, according to PGIM Fixed Income’s macroeconomic team.

In “Free-Falling Turkish Lira—What’s Next?” Jurgen Odenius, economic counselor of PGIM Fixed Income’s macroeconomic team, explores how, without comprehensive policy action, the free fall in the lira is likely to continue and risks unleashing a full-blown run on the banks. The weakening lira makes it more difficult for the Turkish government, banks and corporations to pay back an estimated $229 billion in liabilities.

President Recep Tayyip Erdogan’s and Treasury and Finance Minister Berat Albayrak’s policy speeches on August 10 and the following weekend served to further undermine market confidence, although the lira recovered 6 percent from its record low the morning of August 14, after Turkey’s central bank pledged to provide liquidity.

PGIM Fixed Income expects continued volatility in Turkish assets. Absent a sharp shift in macroeconomic policies, the Turkish economy is at risk of a significant reduction in GDP and potential distress in corporations and banks. However, while the near-term outlook for hard-currency sovereign bonds is uncertain, PGIM Fixed Income’s base case is that the sovereign remains solvent.

Odenius warns against the temptation for Turkey to tap into the large FX deposits in resident banks by forcibly converting some of these deposits into lira. Any hint of capital controls could trigger a capital stampede out of Turkey. A significant share of the foreign funding sources would likely dry up and trigger an even deeper recession.

Another possibility for Turkey would be a turn to other foreign sources of financing, such as Russia or China. Given Turkey’s NATO membership and complicated U.S./Turkish relations, the implications of a potential turn could be substantial.

Read “Free-Falling Turkish Lira—What’s Next?” and other market insights on PGIM Fixed Income’s website.

For a media interview with Jurgen Odenius or to speak with a PGIM Fixed Income subject matter expert on this and other topics, please contact Claire Currie.

The information on this website is not intended as investment advice and is not a recommendation about managing or investing your retirement savings. In making the information available on this website, PGIM, Inc. and its affiliates are not acting as your fiduciary under ERISA, any Department of Labor regulations or any other statutes or regulations.