Golden Horn and Bosphorus at sunset, Istanbul, Turkey
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Investors who fled Turkey in droves over the past few years may start to return, according to a new report from Citibank on emerging trends in Turkey.
Turkey’s economy is scarred by more than five years of dramatic currency depreciation, depleted foreign reserves and unorthodox monetary policies. Inflation in this country of 85 million people reached nearly 70 percent, according to official figures in April, Turks are struggling to buy basic goods and the Turkish lira has lost about 81 percent of its value against the dollar since the same period in 2019.
Turkish President Recep Tayyip Erdogan has maintained tight control over the central bank and refused to raise interest rates in recent years, calling them the “root of all evil” and arguing, in defiance of economic orthodoxy, that lowering interest rates was the way to quell inflation, only to have the opposite effect.
The newly appointed economic and central bank team, appointed about a year ago, seems committed to reversing Turkey’s fortunes, no matter how painful the process may be. The central bank has overseen an aggressive cumulative interest rate hike of 3,650 basis points between May 2023 and January 2024. The central bank raised interest rates again in March this year, bringing them to 50% of the current central bank rate.
At the time, the central bank said it would “maintain a tight monetary stance until we see a significant and sustained decline in the underlying trend in monthly inflation.”
And investors are starting to take notice.
“The authorities’ pivot towards policy normalisation has boosted investor interest in Turkish assets,” said a Citi report published on Thursday.
The bank believes that the performance of the Turkish lira, as well as Turkish government and corporate bonds, will depend primarily on “(i) whether the CBT succeeds in re-anchoring expectations.”
“These are three key priorities: (1) they are essential to contain inflation and address the weakening dollar; (2) a clear strategy to phase out unconventional regulatory measures; and (3) credible fiscal consolidation, which is essential to the inflation containment process and current account adjustment,” the analysts wrote.
The bank said appropriate policy measures in these areas will be crucial to “enhance macroeconomic visibility, boost investor sentiment and attract much-needed quality capital inflows.”
On interest rates, the analysts in the report added: “We believe that the CBT is on the right policy track and that monetary policy is likely to remain relatively tight for longer than markets are currently pricing in.”
Turkey’s inflation accelerated to nearly 70% year-on-year in April, but some economists said the increase was slightly slower than expected, suggesting price pressures may be easing again. Many economists see Turkey’s inflation slowing later this year but don’t see interest rate cuts until 2025.
The rating agency now expects future rating reviews to be more positive, reflecting Turkey’s “policy normalization and fundamental improvements,” according to the Citi report. However, given Turkey’s often turbulent history of politics and the unpredictability of its leadership, the bank added, “We believe Turkey’s credit rating is primarily constrained by its institutional and political risks.”
