"US sanctions and fears that Turkey will be unable to repay its foreign debt have caused a freefall of the lira. Our base case scenario assumes a lira recovery to 5 versus the US dollar by the end of 2018," says ABN AMRO economist Nora Neuteboom.

Key quotes

"Main risks to our scenario: (1) escalation of US-Turkish spat, (2) negative sentiment spiralling out of control and (3) economic policy mistakes by the Turkish government."

"In our base case scenario we think that weakness in the Turkish lira is overdone and a recovery is likely by the end of the year towards 5.0 versus the US dollar. However, in the near term the lira will remain under pressure if investors continue to doubt the ability of Turkey to refinance itself this year. This could result in another 5-10% slide in the lira before a recovery sets in. Next year, we expect the US dollar to weaken across the board. The Turkish lira will also profit from this, but only modestly, as the fundamentals are weak. Our year-end forecasts for USD/TRY for 2019 is 4.5."

"There are considerable risks to our base case scenario. For a start, if the political spat between the US and Turkey escalates, the implementation of financial sanctions would paralyse the Turkish economy. Furthermore, negative sentiment towards Turkey and its ability to pay its external finance obligations could result in a downward spiral. Moreover, as explained in our previous Turkey Watch: A most decisive moment, we think there is a likelihood of economic policy mistakes."

"Turkey must recalibrate its macro-economic policies in such a way that it reduces the aforementioned vulnerabilities, and drives the economy towards a ‘managed slow-down’. This requires delicate policy-making, which may prove difficult given the high domestic political polarisation in a geopolitically unstable region. In case one of these alternative scenarios plays out, the lira could depreciate another 25%."