Likelihood of capital controls in Turkey rising, Jefferies says

The likelihood that Turkey will impose some degree of capital controls is rising with each passing minute, given President Recep Tayyip Erdogan's refusal to allow the central bank to hike interest rates, analysts at Jefferies said.

Equally important, according to analysts Sean Darby, Kenneth Chan and Tommy Tang, the chances that Russia or another country might throw the country a lifeline is low and in any case would probably not be enough to backstop the Turkish lira.

Complicating matters, the central bank was well aware that even if it were allowed to lift interest rates, the result would be a massive credit crunch given just how leveraged the domestic economy was.

Call in the International Monetary Fund? Unlikely, the analysts said.

Not only would it mean having to carry out an unpopular belt-tightening exercise, the details of it would be supervised by foreigners.

However, like Malaysia in the 1990s, Turkey might opt for capital controls and currency devaluation, the broker said.

As an aside, the broker highlighted positives such as the fact that the country's credit financing comes from a range of banks, ranging from Germany, to Spain and through to Japan, via the market for Samurai bonds.

Furthermore, foreigners only owned roughly 20% of the country's bonds, versus around 40% or more in South Africa or Malaysia.

"The bottom line is that the longer the central bank desists from hiking rates the more likely some kind of capital controls will be adopted," the analysts said.

"We remain Bearish on Turkey within our Global Asset Allocation. We don’t believe there is significant contagion risk to other EMs."