Turkey’s economy faces growing risks as it enters a downturn with dwindling reserves and a fragile lira, financial markets signalled on Friday, as data showed factories slowing due to the coronavirus outbreak.

For the first time since the worst day of a currency crisis in 2018, the Turkish lira on Wednesday briefly breached seven lira to the United States dollar after the central bank slashed rates twice as much as expected. It stood at 6.97 at 11:42 GMT on Friday.

Traders have pushed up the odds of a default on government debt in the next 12 months, reflecting unease with a drop in the central bank’s net reserves below $26bn last week from more than $40bn at the beginning of the year.

Turkey faces the combination of high external debt of some $170bn this year, an inability so far to secure a foreign funding source, and the rising costs of girding the economy for a fallout from the pandemic.

Central bank reserves have thinned in large part because of state banks’ market interventions to stabilise the lira that began more than a year ago but ramped up in recent months. The lira has fallen 14 percent so far in 2020.

State banks have sold nearly $20bn in interventions this year through mid-April, according to central bank data and bankers’ calculations. One trader said there were signs of heavy resistance by state banks at seven versus the dollar this week.

Turkey has the fiscal capacity to spend more to absorb shocks in the economy, David Hauner at Bank of America Merrill Lynch wrote in a note.

But it “remains vulnerable to market volatility and a stronger dollar in particular with high external financing needs. A lack of policy clarity further holds back the credit profile,” he said.

Plunging confidence

Business confidence among Turkish manufacturers tumbled to 66.8 points in April from 99.7 a month earlier, central bank data showed. The bearish view was reflected in the capacity utilisation rate, which dropped to 61.6 percent in April from 75.3 percent.

The majority of automotive and textiles factories have halted production in part due to cancelled orders from Europe, Minister of Industry and Technology Mustafa Varank told an auto industry meeting.

Trade, spending and consumer confidence – which hit a record low this month – have also stumbled since measures taken to slow the spread of the coronavirus have pushed Turkey’s economy towards its second recession in less than two years.

To curb a surge in cases of the COVID-19 disease, the government has imposed partial stay-at-home orders, closed restaurants, cafes and schools, largely shuttered borders and slowed domestic movement.

Weekly bank and credit card spending was 15.2 billion lira ($2.2bn) as of mid-April, down from 19.6 billion lira ($2.8bn) a month earlier, separate data showed.

The risk of a default in the next five years is at 600 basis points and near an all-time high touched earlier this month, while the 12-month CDS traded at 438 basis points.

Turkey’s “large external financing requirements, low foreign exchange reserves and weak monetary policy credibility … make it vulnerable to market sentiment, [and] we are seeing some stresses,” Douglas Winslow, Fitch Ratings head of European sovereigns, said on Thursday.

Shorter-term gauges of lira volatility rose on Friday to near one-year highs even while they fell in energy-producing EM currencies, like Russia’s rouble and Mexico’s peso, after a modest rebound in oil prices over the last few days.