Insights 
VT 
Turkey’s budget balance shifted dramatically from a surplus of 96.7 billion to a deficit of 309.6 billion in September. This decline points to challenges in the Turkish economy amid persistent inflation and possible issues with fiscal management.
Greater Dependency on Debt Financing
The budget deficit signals an increased dependency on debt financing. Such fiscal shifts may influence confidence and affect the broader economic perspective for Turkey.
Observers are likely to keep a close watch on changes in Turkey’s fiscal policies. Their focus will be on understanding the implications for economic stability.
Given the sharp reversal in Turkey’s budget to a significant deficit, we anticipate renewed pressure on the Turkish Lira. This fiscal deterioration, announced for September 2025, points to underlying economic weakness that derivative markets will likely price in quickly. Traders should therefore consider positioning for Lira depreciation, potentially by purchasing US Dollar to Turkish Lira (USD/TRY) call options to profit from a rise in the exchange rate.
This budget news is compounded by the latest inflation data, which showed consumer prices rising at an annual rate of over 70%. Such persistent inflation erodes the currency’s value and complicates monetary policy for the central bank. The resulting uncertainty is likely to drive up implied volatility, making long volatility strategies on the Lira attractive for the coming weeks.
Rising Concerns Over Financial Management
We are also seeing the cost to insure against a Turkish default rise, with 5-year credit default swaps (CDS) recently ticking up towards 350 basis points. This reflects growing investor concern over the country’s ability to manage its finances. Consequently, hedging strategies, such as buying put options on the Borsa Istanbul 100 index, could be a prudent move to protect against a potential downturn in Turkish equities.
Looking at historical precedent from similar periods of fiscal strain in 2022 and 2023, the Lira often experienced sharp, sudden depreciations. The central bank may be forced into another interest rate hike to defend the currency, but the market’s reaction could be skeptical. We believe any short-term strength in the Lira on the back of policy action should be viewed as an opportunity to initiate or add to short Lira positions via futures or options.
