Turkey has bounced back after a historic low with the formation of a new economic team.
For the better part of the last decade, Turkey has hardly presented itself as a happy hunting ground for investors. A combination of erratic policy decisions, particularly on the financial front, and a series of short-lived appointments to the central bank have kept foreign funds on the sidelines since the country lost its sovereign investment grade rating in a 2016 coup attempt.
The Turkish lira has lost about 80% of its value against the US dollar over the past five years, hitting a historic low of more than 30 liras to the dollar in January. Inflation remains high at around 65%, and the current account balance is at a worrying level of only 4% to 5% of GDP.
But those who gave up on Turkey after Recep Tayyip Erdogan returned to office for a third five-year term in last May’s presidential election have so far been proven wrong.
In February, Turkey Wealth Fund’s (TWF) maiden $500 million bond offering attracted orders totaling around $7 billion, suggesting the country will be active in the bond market this year. This year, approximately $10 billion is expected to be issued, similar to the 2023 total. TWF holds stakes in major Turkish companies such as Turkish Airlines, Borsa Istanbul and local energy giant Botas, especially after the five-year bond yield fell to 8.3%, below the above-mentioned target level. Observers expect further sales. 9%. Turkey’s five-year dollar bond currently trades at a yield of about 7.6%, which is competitive for an emerging market.
Last year, the number of tourists reached a record number of nearly 50 million, an increase of 10% compared to 2022, and tourism revenue rose 17% to $54 billion. In January, the auto industry posted record export earnings of approximately $2.8 billion. Both were good news for the current account deficit.
Fatih Karahan, the new governor of the Central Bank of the Republic of Turkey, has shown even more determination than his predecessor to curb inflation. Interest rates are now 45%, up from 8.5% nine months ago, and a complex web of unconventional financial regulations is being gradually dismantled. Turkish observers also reassured that the gubernatorial change, the seventh since 2016, was not due to the removal of the president. Mr. Callaghan’s predecessors resigned for a variety of reasons, including personal ones.
Analysts say the trusted team of Karahan and Finance Minister Mehmet Simsek, appointed after last year’s election, has helped transform Turkey’s outlook. Mr. Simsek, a former deputy prime minister who previously worked as an analyst at Merrill Lynch, is expected to guide policy decisions, and his presence will reassure markets.
“Turkey had no choice but to return to rationality,” Erik Arispe, Turkey analyst at Fitch Ratings, said of the new team. “This time last year, our sovereign rating was B with a negative outlook; now it’s B with a stable outlook.” But he warns there are still dark clouds on the horizon.
While policymakers insist they will do whatever it takes to curb inflation, “the big question is how long policy adjustments will last, and how much political space there is for monetary and fiscal tightening.” That’s what I mean,” Arispe argues. If inflation falls significantly, the hit to growth will be substantial, with the forecast expected to fall to 2.5% this year, compared to 4.5% in 2023, when the economy was propped up by pre-election spending. It will be.
investment increases
Although there are early signs that tightening is having an effect, some analysts believe rebalancing will take longer than many expect.
ING economist Muhamed Merkan and emerging markets strategist James Wilson told clients in February that “fourth quarter GDP data showed that personal spending remained strong despite an increasingly tough policy stance.” “This shows that the market is accelerating,” he told customers. “Meanwhile, leading indicators point to further acceleration in GDP in the first quarter of this year. This means there is still a long way to go.”
The good news is that much of that continued growth reflects solid investment, and both the machinery and equipment and construction sectors look healthy. Plans to build four new airports, a new superfast train that aims to connect Istanbul and Ankara in just 80 minutes by 2035, and a 210 billion Turkish lira (6.5 billion) transfer to the southern city of Mersin after the construction of Turkey’s first nuclear power plant. (US$) equivalent investment is planned. All the power plants there suggest that Erdogan has not lost his passion for big infrastructure projects.
Most analysts remain optimistic about a return to orthodoxy, higher interest rates and the impact on the private sector of the lira, which has fallen 40 percent since last year’s election.
The European Bank for Reconstruction and Development said: “We have been working here for 15 years and we feel that: [Turkey] It is vibrant and very resilient,” said Rafik Selim, EBRD chief regional economist in Istanbul. Last year, the bank invested a record 2.5 billion euros ($2.7 billion) in Turkey, including funding for the response to the February earthquake and a significant commitment to green projects. 19.5 billion euros in 440 projects, making Turkey the EBRD’s largest investor. Operating country.
Arispe, Fitch Ratings: Turkey was able to maintain market access during times of stress.
Selim said: “Turkey leverages a large domestic market and major nearshoring opportunities, made even more attractive by its long-standing and close relationship with the EU, with the private sector and small and medium-sized enterprises serving as key drivers of growth. Probably.” ”
Selim points out that Turkey is making progress in investing in human capital, especially in the less developed eastern region, and in digital transformation and renewable energy. Significant investment in solar and wind energy will strengthen long-term sustainability and improve energy security, which is key for countries lacking abundant fossil fuel resources.
In March, the government released a 57-point, two-year investment action plan to “facilitate and streamline legislative, administrative and judicial procedures related to the investment environment,” prioritizing projects that foster digital and green transformation.
A major challenge for Turkey now is to step up its efforts to attract foreign direct investment. In a recent speech, Presidential Investment Committee Chairman Burak Daglioglu said that Turkey has attracted $262 billion in foreign investment since 2003, and that Turkey has attracted $262 billion in foreign investment since 2003, increasing the number of people from lower-middle income countries with an annual per capita income of about $3,000. He said the country had contributed to the country’s transition to an upper-middle-income country, with foreign companies accounting for 8.4% of private employment at an average cost of $13,000 per person.
But difficult economic times have fueled a brain drain in recent years, reaching about $20 billion last year. While much of it could be characterized as hot money, the backlash suggests Turkey may be trying harder to attract long-term investment from abroad.
“Although FDI is net positive, last year it was $10.6 billion, or about 1% of GDP. This is not as high as it used to be, and not as much as Turkey really needs,” warned Selim of the EBRD. , points out that under favorable conditions. From 2005 to his 2008, FDI reached around 3% of his GDP due to Turkey’s enthusiasm for the reform path at the time. There are many reasons for this, including the coronavirus pandemic, the wars in Ukraine and Gaza, and the global trade downturn. “Turkey is not immune to what is happening in the wider region,” Selim warned.
On the plus side, investor confidence appears to be returning. The Istanbul Stock Exchange’s composite stock index has risen more than 20% in dollar terms this year, outpacing other indexes. However, the inflation rate remains hovering around 65%, and real interest rates remain negative.
The positive reaction to last month’s Turkish bond issuance is also a positive. The inflow of foreign capital is important. However, if confidence in the lira declines too much, authorities will need to prepare for all eventualities, including an increase in the current account deficit and unmanageable pressure on the lira deposit system, which protects individuals from exchange rate fluctuations. Stakeholders point out. Equivalent to approximately $80 billion. “Unlike other similarly rated countries, Turkey was able to maintain market access even during periods of stress,” Fitch’s Arispe said.
Ahead of local elections at the end of March, President Recep Tayyip Erdogan promised voters that Turkey would resume its focus on growth once it overcomes the “difficulties” it will have to grapple with in 2024. Analysts welcomed the reassurance that there would be no deviation from current monetary policy orthodoxy as good news. .
“Investors need stability and certainty, and especially that the return to traditional economic policies be maintained,” said EBRD’s Rafik.
