Turkey's dramatic interest rate hike piques interest of foreign investors

Turkey's unexpected, substantial interest rate increase has garnered the focus of international investors, long wary of the nation's financial activities. These investors hint at a potential return to Turkish assets, contingent on the country's sustained adherence to conventional monetary policy, Reuters reported on Monday

On Thursday, the Turkish lira witnessed an impressive 7% surge after the central bank astounded financial markets by escalating its principal rate to 25%, an increase of 750 basis points—three times what had been anticipated.

Senior Turkish officials have hinted at two impending actions aimed at overturning a persistent drain of foreign investment over the years. Their forthcoming steps include the publication of a thorough economic strategy next month to diminish ambiguities and initiating discussions with international investors.

According to a Reuters report on Friday, Finance Minister Mehmet Simsek is set to initiate the investor roadshow on September 19 at the Goldman Sachs headquarters in New York.

While indicators suggest a changing tide, convincing foreign investors to return remains a formidable challenge. Over President Tayyip Erdogan's recent five-year tenure, marked by unconventional and occasionally unpredictable fiscal policies, international trust dwindled. These policies often involved diminishing interest rates amidst escalating inflation.

Nonetheless, five foreign investors relayed to Reuters that the current week's rate enhancement signifies a newfound autonomy among fiscal policymakers. This autonomy underscores their commitment to addressing the persistent strain on the currency and managing inflation expectations.

Viktor Szabo, portfolio manager at abrdn in London, remarked, "It feels like they are rectifying the errors of their initial rate hike choices." He emphasized the sustained pressure on the currency.

Deputy portfolio manager for Emerging Markets Equity Strategy at Van Eck, Ola El-Shawarby, stated that their confidence in Turkey's fiscal picture was steadily growing, hinting at possible future investments.

Post his re-election in May, facing dwindling FX reserves and other financial pressures, Erdogan designated Simsek and appointed former Wall Street financier Hafize Gaye Erkan as the central bank's governor, marking her as the first woman to assume this position.

Vice President Cevdet Yilmaz divulged that a "medium-term programme" would soon outline a progression towards enhanced economic stability, encapsulating three-year macro projections. Yilmaz also mentioned the imminent intensification of the investor roadshow.

As per Simsek, the planned economic approach, which is anticipated to moderate inflation by next May, enjoys political endorsement.

Erdogan, known for dismissing four central bank heads within four years, remains tight-lipped regarding the rate augmentations. Speculations revolve around Erdogan's potential approval of future rate hikes.

Blaise Antin, head of EM sovereign research at TCW in Los Angeles, mused, "The overarching query is if Erdogan sanctions a continued rate hike." Concurrently, JPMorgan anticipates rates to reach 35% by the end of the year.

Considering the inflation rate projected to hit nearly 60% by year-end, the recent hikes partially close the existing disparity. While Turkey's global bonds are integral components of major indices, they've grappled with attracting foreign investment back to their domestic bond markets. Official data indicates that foreign ownership of Turkish bonds has slumped from 20% in 2015 to under 1% now.

Reuters Graphics showcased that in the preceding three months, bonds experienced a mere $110.5 million in cumulative foreign inflows. In contrast, stocks witnessed a significant influx of $1.7 billion.

Officials and investors suggest that the Turkish stock, Eurobond, and CDS markets are promising prospects for the forthcoming years, particularly after the recent rate increment. New investments, primarily from the Gulf states, have provisionally replenished FX reserves.

Kaan Nazli of Neuberger Berman in London emphasized the central bank's proactive stance in response to economic challenges. Along with recent monetary tightness, other measures, like raised taxes and increased FX reserves, hint at enduring transformations.

In a dialogue with Yeni Safak newspaper, Simsek emphasized Turkey's potential allure for foreign investors, given that they maintain policies aligned with global standards.

After the upcoming meetings in New York and the United Nations—expected to be attended by Erdogan—Simsek revealed future trips to London, an IMF event in Morocco, and other engagements in Japan, Singapore, and Hong Kong by 2023's end.