After a big interest rate hike in Turkey, foreign investors are thinking of coming back

  • The Central Bank shocked the market by raising interest rates by 750 basis points to 25%
  • Economic program, investors’ trips abroad to follow
  • Erdogan’s unorthodox ideology sparked a decade-long foreign exodus
  • Signs of a permanent turnaround have caught the attention of investors

ANKARA/LONDON (Reuters) – Turkey’s latest big interest rate hike has caught the attention of long-skeptical foreign investors, who say they may return to Turkish assets if the authorities continue to demonstrate that a return to conventional monetary policy is underway.

The lira rose as much as 7% on Thursday after the central bank shocked the market by raising its key interest rate by 750 basis points to 25% – three times the size of the expected move.

Senior Turkish officials say they plan to take two more vital steps to stem the years-old exodus of foreign investment: They will publish a comprehensive economic program next month that will reduce uncertainty. They will start holding meetings with overseas investors.

Reuters reported on Friday that Finance Minister Mehmet Simsek will kick off the investor roadshow on September 19 at Goldman Sachs’ New York headquarters.

althoug The tide may changeBut convincing investors will not be easy: Over the past five years, foreigners have abandoned Turkey for Turkish President Recep Tayyip Erdogan’s unorthodox and often erratic policies, which have included cutting interest rates in the face of soaring inflation.

However, five foreign investors told Reuters that this week’s rate hike signaled a newfound independence among policymakers serious about addressing persistent pressures on the currency and curbing inflation expectations.

“It looks like they are righting the wrongs they made in their first rate hike decisions,” said Victor Szabo, portfolio manager at Aberdeen in London. “This is a sign of continued pressure on the currency.”

“We have some exposure and we feel more comfortable with the big picture, so we are becoming more positive,” said Ola El Shawarby, deputy portfolio manager for emerging market equity strategy at Van Eck.

“The more evidence we get of a return to orthodoxy, the more likely it is that these investments will be reconsidered,” she said.

Erdogan’s question

Faced with severely depleted foreign exchange reserves and other economic pressures, Erdoğan, who had just won re-election in May, appointed Şimşek as central bank governor, former Wall Street banker Hafiz Cay Erkan — the first woman to run the central bank — to turn things around. around.

Vice President Cevdet Yilmaz told bankers that next month’s “medium-term program” will detail the transition to greater economic and financial predictability and include a three-year macro forecast. He added that the investor roadshow will also accelerate.

Şimşek stressed that his team enjoys political support for his plan, which is supposed to see inflation drop in May next year.

Erdogan, who has sacked four central bank governors in four years, has said little about raising interest rates.

“They’re going to have to raise rates even more in this cycle to have a lasting impact on international investors,” said Blaise Antin, head of emerging markets sovereign research at TCW Asset Management in Los Angeles.

“The question is whether they have the green light from Erdogan to continue.”

The central bank said on Thursday that it will raise interest rates further as needed, with JPMorgan predicting they will reach 35% by the end of the year.

Preliminary steps

And with inflation expected to rise to nearly 60% by the end of the year from around 48% last month, the rate hikes are partially narrowing the gap.

Although Turkey’s international bonds are widely held and form part of the main indices, the country has struggled to attract foreign investors back into its domestic bond markets after a series of lira crises and de facto capital controls.

Official data shows that foreigners own less than 1% of Turkish bonds, down from 10% in 2019 and 20% in 2015. Over the past three months, bonds have seen just $110.5m in cumulative foreign inflows, while equities have seen a rally of $1.7 billion.

Reuters graphics

Investors and officials say Turkish stock markets, European bonds and credit default swaps are more attractive targets this year and next, especially after the rate hikes. New investments from the Gulf states helped buy time and update foreign exchange reserves.

“Ultimately for investors, the final interest rate matters – but the most important thing is that the central bank is ready to act when needed,” said Kan Nazli, portfolio manager at Newburger Berman Asset Management in London. “But seeing this change is positive.”

Aside from the 1,650 basis point monetary tightening since June, there are other signs of lasting change. The authorities raised taxes to reduce the budget deficit and cool domestic demand, began rolling back the costly depreciation-protected deposit scheme, and raised foreign exchange reserves by $20 billion to avert a possible current account deficit.

In an interview with Yeni Safak newspaper, Şimşek said that Turkey holds great promise for foreign investors as long as “we follow rules-based policies that are in line with global norms.”

And after meetings in New York and at the United Nations — which Erdoğan is also expected to attend — Simsek listed plans for trips to London and an IMF event in Morocco, as well as further meetings in Japan, Singapore and Hong Kong by the end. of the year.

(Reporting by Jonathan Spicer in Istanbul and Mark Jones and Georgilina de Rosario in London; Prepared by Mohamed for the Arabic Bulletin) Writing by Jonathan Spicer. Editing by Hugh Lawson

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