Investors back in Turkey for short term only as Erdoğan record questioned

Foreign investors in Turkey are back but they are only putting money to work over the short term, wary of President Recep Tayyip Erdoğan’s record on interest rates.

Central bank rate hikes have encouraged some foreign financial institutions to place cash back into Turkish stocks and bonds - they added a total of $3.9 billion in November and December, the Wall Street Journal reported on Wednesday. Markets are rallying as a result.

The central bank has hiked interest rates at its last two monetary policy meetings to 17 percent, providing a return net of inflation to investors for the first time in months. Annual consumer price inflation in the country stands at 14.6 percent.

But many foreigners are wary about committing to the country in the medium to long term, preferring to wait and see if Erdoğan pressures the central bank to cut interest rates again. Below-inflation interest rates last year dragged the lira to successive record lows against the dollar, threatening financial stability.

“Yields are very high and you can still get very high returns,” said Kieran Curtis, who works as an emerging market fund manager at Aberdeen Standard Investments, according to the Wall Street Journal. He said he added short-term, lira-denominated debt to his portfolio.

Charles Robertson, chief economist at Renaissance Capital, said some investors may be buying into a brief upswing for Turkey - capital is pouring into emerging markets on optimism for an end to the COVID-19 pandemic.

“We’ve seen this so many times before,” Robertson said. “No one believes this is a long-lasting story now. There’s no one left to have any faith that Erdoğan has learned. We’re all assuming this goes on for six months and Erdoğan goes back to calling for interest rate cuts.”

Erdoğan appointed former Finance Minister Naci Ağbal as central bank chief in early November, sacking his predecessor Murat Uysal as the lira slumped to a  record low against the dollar. It was the second dismissal in just over a year.

Murat Çetinkaya had lost his job as the bank’s governor in July 2019 because he failed to cut interest rates to support Erdoğan’s pro-growth economic policies.