Turkey may be edging towards capital controls

Significance

A score below 100 indicates a pessimistic outlook -- the index has not exceeded 100 since March 2018. Increasingly frequent and heavy-handed interventions by the Turkish Central Bank (TCMB) to help shore up the lira have fuelled concerns in financial markets that Turkey is edging closer to full capital controls. Markets and credit rating agencies are particularly focused on Turkey’s dangerously low level of net foreign-exchange (FX) reserves, once short-term dollar borrowing is excluded.

Impacts

• Renewed escalation of the trade conflict and continued dollar strength are turning inflows into EM bond and equity funds into outflows.
• Market expectations of a cut in US interest rates by the year-end will help mitigate recent marked declines in EM asset prices.
• The rise in the price of Brent crude since late 2018 will put pressure on major energy importers such as Turkey, fuelling inflation.