Turkey’s external sovereign debt has become the least attractive asset offered by developing countries after President Recep Tayyip Erdogan’s latest firing of a central bank governor, according to Shamaila Khan, head of emerging market debt at global investment management and research firm AllianceBernstein in New York.

“Credibility, unfortunately, has been lost for the medium term for this [Turkey] administration after what they did over the weekend, which I would classify as one of their biggest policy missteps,” Khan said in a Bloomberg TV interview

The best case scenario for Turkey would be to stabilise markets, she said, though valuations were unlikely to rebound to what they were before the March 19 sacking of Naci Agbal, a central bank governor who was finding favour with the markets after embarking on a course of aggressive tightening to fight Turkey’s high inflation rate.

Erdogan’s decision to replace the central bank chief may have several policy implications, none of which were likely to be positive, Khan said.

‘Only path is orthodox’

“Politicians want growth, they want to reduce unemployment, however, the only path to do so is to maintain orthodox polices for a prolonged period of time and there’s unfortunately no bandwidth [for this with the Erdogan administration].”

Khan anticipated that exchange-rate depreciation and concern over the credibility of the central bank would now feed into inflation.

The new central bank governor is Sahap Kavcioglu, seen as an AKP ruling party loyalist who, like Erdogan, is opposed to the use of high interest rates to curb soaring inflation, unconventionally arguing that it indirectly pushes up prices. He has said the monetary authority will “continue to use the monetary policy tools effectively in line with its main objective of achieving a permanent fall in inflation”, but his actions will remain under close scrutiny as nervous investors look to see whether the central bank has any credible inflation-fighting credentials.

Erdogan is under fire for running ‘boom and bust’ economic policies under which cheap credit is used to inflate the economy in an unsustainable fashion.

The fear is that Turkey is on the cusp of another currency crisis, having not satisfactorily dealt with the aftermath of the August 2018 currency crisis.

Turkey's overall short-term foreign debt, falling due in the next 12 months, reached $140bn, about one-fifth of GDP, in January.

There are anxieties that Turkey’s banks are in a weak position to service their debts.