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Trust wins slowly, but is lost soon. It took Turkey years for the trust of international investors after Receptacle Tayp Eldoan’s unorthodox economic policies surprised massive inflation. Wednesday’s news that the president’s major political opponents are being held by local police will cancel much of the job.
Turkish lira fell more than 10% before turning back some of the losses. The Benchmark BIST 100 Index fell 9%, and its Benchmark Local Currency Debt was its worst day since 2023.
The timing of the sale on Wednesday is particularly painful for international investors who were increasing their exposure to Turkish assets. Foreign holdings of Turkish bonds and equities rose 50% to $54 billion in the 12 months ended March 7, according to data from the Central Bank of Turkey and Bloomberg. This is more than 2022’s Triple The Low Point Hit.
According to Jupiter Asset Management, Lira’s bet on gratitude is one of the most popular and recent deals among emerging market currency investors, with high real interest rates making short-term government bonds particularly popular in hedge funds.
International influx was the result of confluence of factors. The short-term economic situation has improved since the return to more mainstream policies after the 2023 election. GDP is expanding, with official inflation slowing from its peak of over 85%. Also, the relative stability made it easier to think about Türkiye’s long-term potential.
Recent developments on the international arena, including provisional peace advancements with Kurdish rebels and Turkey’s influential role in resolving Ukraine-Syrian conflicts, have also contributed to increasing investor confidence, outweighing concerns about an increasing crackdown on domestic adversaries.
This week’s escalation could cancel it. From a fundamental perspective, market movements make it difficult to maintain economic momentum. For example, weaker lira, preventing efforts to control inflation.
And politics is fundamental, especially when it comes to emerging market economies. The country’s respected finance minister, Mehmet Simshek, tried to reassure investors that the government is not trying to change the direction of economic and monetary policy.
However, Turkish investors have been burned before. The worst-case scenario is to return to presidential pressure to keep interest rates low and maintain late-night central bankers fired fire. If they believe Erdogan is betraying the rule of law, or if they are fully focused on the political battles within the country, they could lose faith in the resilience of economic reform. A system that has lasted for over 20 years is not a guarantee of stability, but may be the opposite.
nicholas.megaw@ft.com
