International investors are gradually making their way back to the Turkish domestic bond market, prompted by extensive economic reforms and enticing high yields. This shift in investment trends follows Turkey's economic overhaul initiated by the new management team appointed in June, post the re-election of President Recep Tayyip Erdoğan in May.
Reversal of Unorthodox Policies
Under the leadership of Hafize Gaye Erkan, the Turkish central bank has raised interest rates from 8.5% to a whopping 40% since June. This move is aimed at controlling the soaring inflation, which currently stands at a staggering 60%. The new economic team has also reversed previous unconventional policies that were responsible for high inflation and other economic imbalances.
Tightening Fiscal Policy
Alongside these monetary measures, fiscal adjustments have been implemented in the form of tax increases and other measures. The government has also allowed the Turkish lira to fluctuate more freely, a move that also signals a shift from previous economic practices.
Foreign Investment Trends
Foreign fund managers have invested approximately $700 million in Turkish government bonds in lira in the latter half of this year, marking the largest inflow since early 2021. Despite this positive trend, foreign holdings of Turkish government debt remain below 1%, a significant drop from the 22% recorded in 2015.
Investors, while acknowledging the positive changes, remain cautious due to potential policy reversals ahead of the local elections in March and the ongoing depreciation of the lira. Additionally, political tensions between Turkey and Western allies, particularly over Turkey's stance on Hamas and its indirect support of Russia's war effort, are fostering further uncertainty for investors.