Foreign investors bet on Turkey, drawn by rate cut, inflation Reuters
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By Libby George and Karin Strohecker
LONDON (Reuters) – Foreign investors are flocking to Turkey’s domestic debt markets, buoyed by lower interest rates and easing inflation and hoping regional change will boost their bets on the economy.
Turkey’s central bank cut interest rates by 250 basis points to 45 percent on Thursday, continuing an easing cycle it began last month to stem years of rising prices and a weak currency.
More than a year and a half after the re-election of President Tayyip Erdogan, a return to orthodox economic and monetary policies has made Turkey a hotbed for emerging market investors.
“Turkey is one of the biggest success stories, one of our favorite positive changes in the space,” said Nick Eisinger, co-head of Emerging Markets with Vanguard.
“The recovery story and the macro story is very positive and still has a runway to go.”
Domestic bonds received $1.24 billion in cash from foreign investors in the week to Jan. 17, the biggest inflows in two months, bringing the 2025 total to $1.9 billion, central bank data showed. Foreigners hold more than 10% of government debt, with the latest levels seen in 2019.
While this is a significant increase compared to 1% in 2022, it is still less than half of the 25% before the lira crisis began in August 2018.
Emerging from that crisis was very boring.
For years, Turkey has opted for unconventional fiscal and monetary policies that fueled red-hot growth. According to Oxford Economics, it has taken the highest place for economic growth among major emerging markets since the start of the Covid-19 crisis.
But exposure to local bonds has paid a heavy price: with inflation soaring to 85 percent by 2022 and touching 75 percent last year, and the lira falling to a series of record lows, large investments have been lost.
DISINFLATION
A more favorable recent story has seen Amundi, Europe’s largest asset manager, dive into domestic bonds.
“We like Turkey from a local currency perspective,” said Yerlan Sizdikov, global head of emerging markets and co-head of emerging markets fixed income at Amundi.
The softening of inflation, which was 44.38% below expectations annually in December – coinciding with the weak balance of payments situation – was favorable for investors to allow the Turkish lira to slide further, Syzdykov said.
“The rate of inflation has to be faster than the rate of deflation – so that’s the bet we have.”
According to a Reuters poll, the Bank itself expects inflation to fall to around 21%, while the central bank is expected to cut its key rate by 30% by the end of the year.
While the government is not interested in pushing for higher growth for now, recent regional developments – including the ousting of Syrian leader Bashar al-Assad and an Israel-Hamas ceasefire in Gaza – will boost Turkey’s pace of growth, analysts said.
“Everything that has happened in the Middle East is very positive for Turkey,” said Magda Brant, head of emerging markets and Asia fixed income.
“Turkey will probably be a player in the reconstruction of the region and the reconstruction of Ukraine … so there is definitely some positive news from a growth perspective and a budget perspective.”
Turkey still needs to ensure that its orthodoxy remains intact before turning back so-called cross-border investors: major developed market investors also fall into emerging markets. Often managing large pots of money, they seek exposure to emerging economies in recent months, particularly investment-rated sovereigns in the Gulf or Latin America.
“From their point of view, for these reasons it is very dangerous to go to Turkey … on the geopolitical side, but also because of the weakness of institutions,” said Amundi Sizdikov.