Turkish markets are ‘on the verge of a renaissance moment,’ Citi says

Investors who ran from Turkey in droves over the last several years may want to start heading back, the latest report from Citi on the country’s nascent signals.

After more than half a decade of dramatically depreciating currency, burning through FX reserves and unorthodox monetary policy, Turkey’s economy is battle-scarred. Official April figures show inflation in the country of 85 million sits at nearly 70%, Turks struggle to afford basic goods, and the lira has lost some 81% of its value against the dollar since this time in 2019.

Exercising tight control over the central bank, Turkish President Recep Tayyip Erdogan for the last few years refused to raise rates, calling them “the mother of all evil” and insisting, against economic orthodoxy, that lowering them was the way to cool inflation — which ended up achieving the opposite.

New economic and central bank team appointments since roughly a year ago appear dedicated to reversing Turkey’s fortunes, no matter how painful the process. The central bank oversaw an aggressive cumulative rate increase of 3,650 basis points between May 2023 and January 2024. It lifted rates again in March of this year, to the central bank’s current 50%.

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

And investors are taking notice.

“The authorities’ shift towards policy normalization has galvanized investor interest in Turkish assets,” according to a Citi report published Thursday.

The bank holds that the performance of the Turkish lira, as well as the country’s sovereign and corporate bonds, will be determined primarily by “(i) the CBT’s success in re-anchoring expectations, which will be
crucial for disinflation and de-dollarization; (ii) a clear strategy to phase out unconventional regulatory measures; and (iii) a credible fiscal consolidation, which will be essential for the disinflation process and the current account adjustment,” its analysts wrote.

Making the right policy moves in those areas will be crucial for “macroeconomic visibility, boosting investor sentiment and attracting much-needed high-quality capital inflows,” the bank said.

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

While Turkey’s inflation accelerated to nearly 70% year-on-year for the month of April, some economists noted that the rise was actually slightly smaller than expected, suggesting that price pressures may have softened again. Many economists see inflation in the country falling in the second half of this year, but don’t expect any rate cuts until 2025.

Ratings agencies are now reflecting the “policy normalization and fundamental improvements” that Turkey is making, the Citi report said, predicting more positive upcoming ratings reviews. Still, given the often turbulent history of Turkish politics and frequent unpredictability of its leadership, the bank added, “We think Turkey’s credit rating is mainly constrained by its institutional and political risks.”