Policy concerns will keep Turkish lira under strain

Significance

Mounting concerns that a faster-than-expected global economic recovery from the COVID-19 pandemic will spur inflation, forcing the leading central banks to signal an earlier-than-expected withdrawal of monetary stimulus, have contributed to renewed pressure on the lira. Although Turkey is less vulnerable than it was in 2013, it is still acutely susceptible to a sharp deterioration in risk appetite.

Impacts

• Policy tightening in the fourth quarter will probably be reflected in lower growth in the current and later quarters.
• Provided the coronavirus threat fades and vaccination proceeds apace, the prospects for tourism and some service sectors will improve.
• Base effects and financial and economic stability may allow growth of 3-5% in 2021, despite lira volatility and high corporate debt levels.