What could be Turkey’s biggest fiscal tightening this century was pulled out of the hat by Turkish Finance and Treasury Minister Berat Albayrak on August 16 as in a conference call with 6,000 investors he continued with his attempt at talking up the beleaguered Turkish lira (TRY).

Albayrak was clear that Ankara is not preparing to either introduce capital controls or go to the International Monetary Fund (IMF) for a bailout as it strives to rescue its currency from a devaluation of epic proportions and prevent the lira emergency from triggering a debt and liquidity crisis. His words appeared to have the requisite effect, with the TRY moving to 4% up day on day against the dollar after the call.

But not long after, the fragility of Turkey’s situation was demonstrated when the TRY lost some of its gains after news broke that US Treasury Secretary Steve Mnuchin had told a cabinet meeting that he was preparing to impose more sanctions on the Turks if they did not quickly release North Carolina pastor Andrew Brunson. The evangelical pastor—described as the “wonderful pastor” by President Donald Trump during the cabinet meeting—is under house arrest while being tried on espionage and terrorism charges which the US says are groundless.

By around 21:40 local time on August 16, the lira stood at 5.8205, 2.26% stronger versus the dollar on the day. Its loss versus the USD in the year to date thus stood at around 40%, but there has been a marked recovery in the currency’s value since it plunged all the way to an all-time low of 7.24 on August 13. That nosedive came after Turkish President Recep Tayyip Erdogan—who claims Turkey’s financial troubles are not down to economic fundamentals but are the result of an “economic attack” waged by foreign powers—accused the US of seeking to “stab your strategic partner in the back”.

In the much-anticipated conference call, Albayrak indicated the country would largely deploy fiscal measures to slow the economy and cut the hefty current account deficit and inflation running at nearly 16%. With the orthodox path of a big interest rate hike seemingly ruled out—unless Erdogan, widely viewed as having taken control of monetary policy, relents on his unconventional view that Turkey, despite its predicament, still needs cheaper money—Albayrak said ministries would be asked for expenditure cuts of 10-30%. Such fiscal squeezing would allow the government to aim for a primary surplus of TRY6bn for the rest of this year, he said.

“Dotty views”
Not everybody was impressed by Albayrak’s planned navigation. Robert Ward of the Economist Intelligence Unit tweeted: “Albayrak’s plan to stabilise Turkey’s economy invites scepticism. Fiscal policy to do heavy lifting via cuts. Little to say on interest rates. Thus Erdogan’s dotty views on rate rises/inflation still prevail. CB independence/lack thereof thus still a key risk to stability.”

Cristiana De Alessi of BNP Paribas gave the finance minister some credit for his plans but warned that Turkey is not out of the woods. Citing Turkey’s heavy reliance on external funding—new data out on August 16 showed that as of the end of June Turkey was on the hook for foreign debt repayments amounting to $179bn within a year—De Alessi said: “The finance minister provided some comfort by acknowledging that rebalancing the economy is a priority through both fiscal and monetary policy and that capital controls aren’t an option.”

She added: “The MTP [medium-term programme] released in September will be key to see what concrete steps will be taken to turn this into sustained action. It will also provide a benchmark to measure the new government’s progress. My main concern is a lack of contingency plan if debt cannot be rolled over or if a slower growth rate exacerbates corporate NPLs [non-performing loans. Turkey may require a stronger adjustment than is currently in their plans.”

Demonstrating that all is far from well with Turkey’s economy, the Istanbul stock exchange’s main index slid by 3.46% on August 16 to 87,143 despite the ongoing lira recovery. Also, freshly released figures showing weak growth in Turkish industrial production in June indicated that the economy, which outdid China by expanding 7.4% last year, is in for a hard landing.

A recession may be the medicine required for rebalancing the balance of payments, but the banks will not be looking forward to worsening loan default difficulties.

Per Hammarlund, chief EM Strategist at Nordic bank SEB, said in a note that Turkey could still be forced to seek help from the IMF, despite what Albayrak pledged to those listening in on the call.

“A credible commitment to grant the Turkish central bank monetary policy independence is critical. Unless the government introduces an austerity programme within the next weeks, an event such as sharply higher inflation (likely) or a large fine on Halkbank for violating US sanctions on Iran (possible) could trigger a full-blown balance of payments crisis, followed by a banking crisis. So far, the government has shown few signs of being willing to change course, either on economic policy or in its relations with the US,” wrote Hammarlund.

He added: “The TRY is in for a bumpy ride on the road to the International Monetary Fund (IMF). The CBRT’s [Central Bank of the Republic of Turkey’s] actions this week and agreements with China and Qatar [for capital] may take USD/TRY down to 5.50 or even lower, but without structural reform, the pair could reach 8.00 this year.”

“There’s denial”
Julian Rimmer, a London-based trader at Investec Bank, was another analyst not buying Albayrak’s package. He said: "There’s denial and a refusal to accept market realities and the fact they will have to hike rates and/or cut spending very sharply. There’s no way of getting round it. It seems like they think they can. The only modicum of encouragement was that he expressed commitment to cutting spending and said they’d already started that."

Further explaining his action plan, Albayrak said that rather than go for an IMF stand-by deal, Turkey would concentrate on foreign direct investment and a review of big projects to improve the efficiency of spending. He did not expect the US to fine Halkbank and the banking system would get the support and additional funding from the state where necessary, he added.

Timothy Ash at BlueBay Asset Management said that considering it was Albayrak’s first such call with investors, he had put in a “decent performance”.

“I guess the consensus is ‘now deliver’,” he added.