Since mid-November, Turkey has been facing high financial stress.
Economy is both source of surprise and concern.
The Turkish economy is surprising. Until now, growth has been resilient. The PMI indexes, which are companies' confidence barometers, remained above 50 until December. The current deficit should remain under 2% of GDP despite the increase in oil prices. The budget deficit might have been limited to 2.5% of GDP.
The Turkish economy also causes some concern.
Since mid-November, the Turkish pound has depreciated by around 28% against a euro-dollar basket.
Sovereign debt yields in local currency rose above 20%. This is due to a conscious accommodative monetary policy, despite a huge acceleration in inflation which went from 20% in October to 36% in December.
The central bank has reduced further its main policy rate. It went from 19% in September to 14% today.
At the same time, the central bank's foreign reserves decreased by 17 billion dollars. Even though the central bank has limited its interventions.
Finally, the dollarization of deposits has accelerated up to the end of the year.
Since the last week of December, tensions have slightly dissipated.
The authorities have announced a series of emergency measures first to protect households' and companies' savings and encourage them to maintain or increase their assets in Turkish pounds and second to attract foreign investors.
But the authorities have also forced companies to repatriate 25% of their export revenues.
Beyond these emergency measures, the authorities' strategy is to sustain an export-led growth thanks to a low exchange rate and to drive investment and domestic credit thanks to negative real interest rates.
By stimulating competitiveness, this new economic policy bets on a long-term recovery of the current account. This would help to stabilise exchange rate and in fine to reduce inflation.
This a daring gamble.
Household confidence is at an all-time low due to the acceleration of inflation. The depreciation of the pound can improve the current balance, excluding energy. But it raises at the same time the cost of the energy bill.
Above all, it requires higher doses of nominal depreciation to maintain competitiveness exchange gains in real terms.
Furthermore, exchange rate depreciation can have an impact on banks' and companies' balance sheets.
The risk is limited for banks.
They have to balance their on-balance sheet debtor position with an off-balance-sheet creditor position.
Since the end of 2019, moreover, this off-balance-sheet creditor position is more stable because banks' counterparty is now the central bank and no longer foreign investors.
By contrast, corporates have a large fx exposure. Fortunately, the short-term fx position is positive thanks to deposits in dollars.
Moreover, the rollover rate of medium and long-term debt of corporates remained above 100% until November.
The main risk arises from the domestic debt in dollars that represents 20% of GDP. This debt is partly carried by companies that do not have currency resources.
