Net non-resident capital inflows into Turkey are expected to increase in 2025 if orthodox macroeconomic policies are maintained, the Institute of International Finance (IIF) said in a report.
“Authorities signal their determination to maintain a tight policy stance until significant progress is made in containing inflation and guiding inflation expectations on a downward trajectory,” the committee said in a report titled “Capital Flows to Emerging Markets” on Wednesday.
The ministry said tightening macroeconomic policies helped Turkey’s current account deficit narrow to $10.9 billion in the first quarter of this year from $24.6 billion in the same period last year, and that these policies had attracted significant net inflows of non-resident capital.
The near-term outlook for net capital inflows into Turkey will depend on whether resident and non-resident investors view the wider spreads offered by Turkish assets as sufficiently attractive, especially given that continued or even more stringent policies will further reduce Turkey’s external and internal vulnerabilities, including narrowing the current account deficit and easing inflation, it added.
The Washington-based International Financial Services Industry Association said it expects the wider interest rate spreads will allow Turkey to attract enough capital inflows to narrow its current account deficit from 4.2 percent of GDP in 2023 to 2.6 percent of GDP in 2024 and 2.2 percent in 2025.
“We project that such an external financing scenario would be consistent with real GDP growth slowing from 4.5 percent in 2023 to 3.5 percent in 2024 and then to 2.5 percent in 2025,” the report said.
The IIF also projected that net external borrowing in the form of loans from non-resident creditors would fall, reflecting slower real GDP growth and weaker demand for credit.
The association expects net non-resident capital inflows to decline slightly from $66 billion in 2023 to $62 billion in 2024, before rising to $68 billion in 2025.
“The main downside risk is a deterioration in investor sentiment towards Turkish assets, which could be triggered by premature policy easing and failure to achieve the expected reductions in inflation and the current account deficit,” the report said.
