Foreign investors applaud Türkiye’s economic stability with caution: FT

Foreign investors applauded Türkiye’s economic leadership for swiftly intervening to stabilize the economy and restore market confidence amid rising political tensions; nevertheless, they remain cautious about the potential for further shocks, according to the business-focused Financial Times (FT).

According to the FT analysis published on Friday, the Turkish central bank‘s intervention — injecting up to $25 billion into the market to boost currency supply — was seen as crucial to ensuring stability after the lira plunged beyond 40 to the U.S. dollar following a corruption probe targeting Istanbul Mayor Ekrem Imamoglu on March 19.

While the lira has since recovered slightly, trading around 38, Turkish policymakers are believed to think the worst may be over despite significant capital outflows, the Financial Times noted. Experts cited by the FT said the central bank’s efforts to ease foreign exits are manageable in the short term, but maintaining interventions at this scale would be difficult.

“If such interventions last beyond a week, it will be tough for Turkish policymakers to hold the line,” said Mohammed Elmi of U.S.-based asset management company Federated Hermes.

Turkish central bank data shows net international reserves dropped by $11.8 billion to $62.1 billion in the week ending March 21, returning to end-2023 levels. Excluding swaps, reserves fell by $13.2 billion — the sharpest weekly decline since April 2020.

Swiss asset management company Vontobel’s Carlos de Sousa stressed that over the past 18 months, finance minister Mehmet Simsek and central bank governor Fatih Karahan have been credited with restoring market confidence and rebuilding Türkiye’s net foreign reserves to about $65 billion, describing this achievement as a “remarkable success.” However, he pointed out how rapidly the reserves — which had taken over a year to rebuild — were put under pressure during just a few days of market turmoil.

‘Carry trade unwinds, reserves hit hard’

A major factor behind the market instability was the unwinding of a $35 billion carry trade, as highlighted in the report. This investment strategy — where investors borrow in low-interest currencies like the yen or dollar to invest in high-yield Turkish assets — was heavily promoted by Turkish authorities to attract capital. But as the lira hit critical thresholds, leveraged hedge funds rushed to exit, accelerating the currency’s fall.

Brad Setser, a senior fellow at the Council on Foreign Relations and a former U.S. Treasury official, explained that this mass unwind fueled the rapid intervention. He also agreed that while the worst may now be over, selling through another $10 billion of reserves would be a significant risk.

At the same time, local residents’ foreign currency deposits, adjusted for exchange rate effects, rose by $5.9 billion last week — the largest increase this year — bringing the total rise in 2024 to $15.8 billion.

Although the central bank’s bold action helped restore some calm, investors remain concerned about domestic risks, said Yvette Babb of U.S. investment bank William Blair. One of the key concerns, she noted, is the potential for locals to start “dollarizing” their savings if confidence in the lira continues to weaken — a scenario that could further strain the financial system.