The Institute of International Finance (IIF) on August 28 noted that a “sharp slowdown in credit flow looks to be unfolding” in Turkey.

The resulting negative credit effects could cause economic activity in the second half of the year to fall sharply in the country, setting up 2019 for negative growth, IIF analysts including managing director and chief economist Robin Brooks said in a note.

Growth in Turkey is the most credit-dependent across emerging markets, they concluded, but added that the gradual depreciation of the Turkish lira (TRY)—which has weakened against the dollar by around 40% in the year to date—had helped dissolve pressure in the system. That meant that the kind of contraction in activity that Argentina saw in 2002 was unlikely to occur, they said.

Looking at the TRY depreciation, the IIF analysts added: “The Lira has trend depreciated for many years, but recent weeks have seen that decline accelerate sharply. In real terms, we estimate that the currency has fallen around 30 percent over the last two years, a large magnitude by any measure… We find nine episodes since 1980 where the real exchange rate falls at least as much and as permanently as the Lira: Mexico (1995), Indonesia (1998), Russia (1998), Brazil (1999), Argentina (2002), Uruguay (2002), Egypt (2003), Ukraine (2014) and Egypt (2016).”

“The sharp slowdown in credit flow that looks to be unfolding—and the resulting negative credit impulse—could cause activity in H2 to fall sharply, setting up 2019 for negative growth, the first contraction since 2009,” they said.