Last month we warned that the signals from our EM crisis framework were painting a mixed picture of the Turkish economy, which suggests that investors should stay on the sidelines for
now. There has been little improvement since then, with credit default swaps continuing to price in a non-negligible default probability and investors pulling out of Turkish ETFs.

A key indicator to watch going forward will be the relative demand for local versus foreign currency deposits by Turkish residents. Although many investors will focus on foreign portfolio flows, the behaviour of locals is also an important barometer of risk sentiment, particularly in emerging markets where economic data quality is low and political developments can be opaque. For the time being, Turkish residents continue to run down lira holdings while increasing allocations to foreign currency deposit accounts. The eventual reversal of this trend will likely mark the end of the crisis as locals see conditions on the ground improve and confidence in the value of the currency is restored.

(Click on image to enlarge.)

Source: Bloomberg, Macrobond and Variant Perception