Turkey’s policy uncertainty will worry investors

Significance

The limited rate hike (annual core inflation is running at 47%) has undermined foreign investors’ hopes that President Recep Tayyip Erdogan’s new economic team would be free to adopt a fully fledged 'orthodox' economic policy. Immediate market reaction was mixed; credit default swap (CDS) spreads worsened but bond yields eased slightly and share prices strengthened.

Impacts

• Weak emerging market sentiment, because of concerns over global economic activity, would further undermine the value of Turkish assets.
• Turkey’s non-investment grade corporate bond market is vulnerable to declining economic activity and weak investor confidence.
• The lira will depreciate further but could still be subject to central bank intervention to slow the fall.