Turkey's recent significant interest rate hike has caught the attention of long-skeptical foreign investors, who indicate they may reconsider Turkish assets if the authorities continue to demonstrate a return to orthodox monetary policy.
Last Thursday, Turkey's central bank raised the benchmark interest rate by 750 basis points to 25%, three times the market's anticipated increase. Senior Turkish officials announced plans to take two additional critical steps to reverse years of foreign investment outflow and will unveil a comprehensive economic plan next month aimed at reducing the impact of economic and monetary policy uncertainty on foreign investors.
Though Turkey's recent actions have garnered foreign investors' attention, convincing them to return is no easy feat. In the past five years, the unorthodox and unstable policies of President Tayyip Erdogan, including significant interest rate cuts amidst soaring inflation, have nearly driven foreigners away from Turkey.
Reuters reported last Friday that Turkish Finance Minister Mehmet Simsek will begin an investor roadshow at Goldman Sachs' headquarters in New York on September 19. Several foreign investors expressed that last week's aggressive rate hike by the Central Bank of Turkey not only demonstrated its independence in monetary policy but also reflected expectations for addressing currency depreciation and controlling inflation.
Investors like Viktor Szabo, portfolio manager at Abrdn, and Ola El-Shawarby, deputy portfolio manager for emerging market equities at Van Eck, stated they are hopeful about Turkey's situation, feeling the central bank is correcting the mistakes made during the initial rate hike. The more evidence there is of Turkey’s authorities returning to orthodox monetary policy, the higher the likelihood of foreign investors coming back to the country.
Facing severe depletion of foreign exchange reserves and other economic pressures, Erdogan re-elected in May appointed former Wall Street banker Hafize Gaye Erkan as the central bank governor to address Turkey's current pressures.
Turkish Deputy President Cevdet Yilmaz stated that next month's "mid-term plan" will detail the transition to higher economic and financial predictability and include a three-year macro forecast. Blaise Antin, director of emerging markets sovereign research at asset management firm TCW, said Turkey must further hike policy rates in its "mid-term plan" to have lasting appeal to international investors.
Despite Turkish international bonds being widely held and forming part of key indices, a series of lira crises and de facto capital controls have made it challenging for the country to attract foreign investors back to its domestic bond market. Official data shows that foreign holdings of Turkish bonds are below 1%, significantly down from 10% in 2019 and 20% in 2015. Over the past three months, the bond market saw a net foreign inflow of only $110.5 million, while the stock market surged by $1.7 billion.
Besides a cumulative tightening of monetary policy by 1650 basis points since June, other signs indicate enduring changes in Turkey's situation. The country has raised taxes to limit budget deficits, reduced costly deposit devaluation protection schemes, and increased foreign exchange reserves by $20 billion to avert a potential current account deficit crisis.
Investors and Turkish officials say that consecutive major rate hikes, along with new investments from Gulf countries, have bought Turkey time and replenished its foreign exchange reserves. Simsek, in an interview with Yeni Safak, stated that as long as we follow world-standard, rule-based policies, Turkey has great appeal to foreign investors.
After meetings in New York and with the United Nations, Simsek outlined plans to visit London, participate in the International Monetary Fund event in Morocco, and attend other meetings in Japan, Singapore, and Hong Kong by the end of the year.
