Turkish Lira depreciation in August is the consequence of an unsustainable growth regime financed by rising private debt (mainly external debt), combined with a current account deficit that had become excessively financed by short-term capital flows. In our view, the economy is experiencing a classical balance of payment crisis. Even before the recent crisis, Turkey was the most vulnerable country among the main emerging markets (EM). A mix of monetary policy action, economic adjustments and temporary recourse to some forms of capital control could potentially help to mitigate the crisis, with some de - escalation possible on the geopolitical front between the US and Turkey, but in the short term, volatility will remain high.
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