Citi says Turkish market ‘is at a moment of renaissance’ | Wilnesh News

Investors who have fled Turkey in droves over the past few years may want to start returning, according to Citi’s latest report on emerging signals from the country.

After more than five years of sharp currency depreciation, depletion of foreign exchange reserves and unorthodox monetary policies, Turkey’s economy is scarred. Official data in April showed inflation in the country of 85 million was close to 70%, with Turks struggling to afford basic goods and the lira having lost about 81% of its value against the dollar since this time in 2019.

Turkish President Recep Tayyip Erdogan maintains tight control over the central bank, refusing to raise interest rates in the past few years, calling it the “mother of all evil” and rejecting economic orthodoxy, insisting that lowering interest rates will cool inflation. method – which ultimately achieves the opposite effect.

Since about a year ago, new economic and central bank teams have been appointed that appear committed to turning around Turkey’s fortunes, no matter how painful the process. From May 2023 to January 2024, the central bank raised interest rates by a cumulative 3,650 basis points.

“The tight monetary stance will be maintained until a significant and sustained decline in the monthly underlying trend in inflation is observed,” it said at the time.

Investors are taking notice.

“The authorities’ shift towards policy normalization has fueled investor interest in Turkish assets,” a Citi report released on Thursday said.

The bank believes that the performance of the Turkish lira and the country’s sovereign and corporate bonds will depend primarily on “(i) the success of the CBT in reanchoring expectations, which will be
critical for deflation and de-dollarization; (ii) a clear strategy to phase out unconventional regulatory measures; and (iii) credible fiscal consolidation, which is critical for the deflation process and current account adjustment,” its analysts wrote road.

The bank said the right policy initiatives in these areas are critical for “macroeconomic visibility, boosting investor sentiment and attracting much-needed high-quality capital inflows.”

On interest rates, the report’s analysts added: “We believe the CBT is on the right policy path and monetary policy may remain relatively tight for longer than currently expected by the market.”

Although Turkey’s annual inflation rose to nearly 70% in April, some economists pointed out that the increase was actually slightly smaller than expected, indicating that price pressures may be weakening again. Many economists expect the country’s inflation rate to fall in the second half of this year, but no interest rate cuts are expected before 2025.

Citi reported that ratings agencies are now reflecting the “policy normalization and fundamental improvements” being undertaken by Turkey and predicted that upcoming ratings reviews will be more positive. Still, given Turkey’s history of often turbulent politics and the often unpredictable nature of its leadership, the bank added, “We believe Turkey’s credit rating is primarily constrained by its institutional and political risks.”