by Nevzat Devranoglu and Karin Strohecker
ANKARA/LONDON (Reuters) – Turkey’s latest massive interest rate hike has drawn the attention of long-skeptical foreign investors to the prospects for Turkish assets, which they could now reverse if authorities continue to demonstrate that a return to an orthodox monetary policy is underway.
The lira gained as much as 7% on Thursday after the central bank surprised the market by raising its key rate by 750 basis points to 25%, three times higher than consensus forecast.
Senior Turkish officials said they plan to take two other key steps to reverse the foreign investment outflow that has been going on for years: release a comprehensive economic program next month that will reduce uncertainty and hold meetings with overseas investors. .
Finance Minister Mehmet Simsek will kick off the meetings with a meeting scheduled for September 19 at Goldman Sachs headquarters in New York, Reuters reported on Friday.
Foreign investors have all but abandoned Turkey over the past five years, due to President Recep Tayyip Erdogan’s unorthodox and often erratic policies, including lowering interest rates in the face of soaring inflation.
Five foreign investors, however, told Reuters that the recent rise in interest rates was a sign of a new independence of the central bank, which seems to be serious about tackling pressures on the currency and curbing inflation expectations.
“It feels like they are correcting the mistakes made with their early rate hike decisions,” said Viktor Szabo, portfolio manager at abrdn in London. “And that’s a sign that the currency remains under pressure.”
Ola El-Shawarby, deputy portfolio manager for emerging markets equity strategy at Van Eck, said he “has some exposure” to Turkish assets. “We feel more and more comfortable with the general situation, which allows us to be more constructive.”
“The more evidence we have of the return to orthodoxy, the more likely we will be to reconsider our positioning,” she added.
THE UNKNOWN ERDOGAN
Faced with severely reduced foreign exchange reserves and other economic strains, Erdogan, freshly re-elected in May, appointed Simsek and chose former Wall Street banker Hafize Gaye Erkan – the first woman to lead – as central bank governor. the central bank – to rectify the situation.
Vice President Cevdet Yilmaz told bankers that the “medium-term program”, to be released next month, will detail the transition to greater economic and financial predictability and include three-year macroeconomic forecasts. He added that investor presentations would also pick up speed.
Mehmet Simsek stressed that his team had political support for his plan, which foresees a decline in inflation around May next year.
Recep Tayyip Erdogan, who sacked four central bank directors in four years, said little about rate hikes.
“Key rates will need to rise again to have a lasting effect on international investors,” said Blaise Antin, head of emerging market sovereign debt research at Los Angeles-based asset manager TCW.
“The question is whether they have the green light from Erdogan to continue.”
The central bank said on Thursday it would raise rates if necessary and JPMorgan predicted they would hit 35% by the end of the year.
PROVISIONAL MEASURES
With inflation expected to reach nearly 60% by the end of the year, up from nearly 48% last month, rate hikes are partly narrowing the gap between monetary policy and rising price momentum.
While Turkey’s international currency bonds are among key indices, the country is struggling to attract foreign investors back to its domestic bond market after a series of lira crises and measures effectively controlling capital flows.
Foreigners hold less than 1% of Turkish bonds, down from 10% in 2019 and 20% in 2015, according to official data. Over the past three months, bonds have seen just $110.5 million in inflows from overseas investors, while equities have seen a $1.7 billion run.
Turkish stocks, Eurobonds and CDS are more attractive assets this year and next, especially after rising rates, investors and officials say. New investments from Gulf countries have saved time and rebuilt foreign exchange reserves.
“At the end of the day, for investors, the final rate is important, but it is above all the fact that the central bank is ready to act in case of need that matters,” said Kaan Nazli, portfolio manager at the manager. of Neuberger Berman assets in London.
Besides the 1,650 basis points of monetary tightening since June, there are other signs of a change in posture.
The authorities raised taxes to limit the budget deficit and cool domestic demand. They also began scrapping a costly depreciation-protected depository system and boosted foreign exchange reserves by $20 billion to head off a potential current account deficit crisis.
In an interview with Yeni Safak newspaper, Mehmet Simsek said that Turkey holds great promise for foreign investors, provided “we follow rules-based policies that meet global standards”.
After the meetings in New York and at the United Nations – which Recep Tayyip Erdogan is also expected to attend – Mehmet Simsek said he planned to visit London and an International Monetary Fund (IMF) event in Morocco. He also plans to participate in other meetings in Japan, Singapore and Hong Kong by the end of the year.
(Reporting Nevzat Devranoglu, Karin Strohecker, with contributions from Jonathan Spicer in Istanbul, Marc Jones and Jorgelina do Rosario in London; written by Jonathan Spicer; French version Corentin Chapron, edited by Blandine Hénault)
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