LONDON: Goldman Sachs said it expected the squeeze in lira offshore liquidity and volatility to hit Turkey's domestic economy which could put at risk the investment bank's forecast for a 2.5 percent contraction in 2019 gross domestic product.
London lira overnight rates had come into focus last week after rocketing to 1,200 percent on Wednesday as the currency came under pressure in the run up to Sunday's local elections.
While the spread between onshore and offshore rates had now declined from exceptionally high levels, Goldman Sachs said it expected the decline in offshore liquidity to have "lasting consequences".
"Turkey's banking system has a surplus of FX funding, due to its high level of FX deposits and FX wholesale funding and banks have relied on the offshore swap market to fund their Lira lending," Goldman Sachs' Clemens Grafe and Murat Unur wrote in a note to clients dated April 1.
"While it is possible that the swap market will normalise over time, we suspect that the recent volatility will result in liquidity premium remaining higher, leading to a tightening in domestic financial conditions. This implies downside risks to our below-consensus GDP growth forecast of -2.5 percent for the year."
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