Turkey’s Year of Drama Hands Investors These 2021 Priorities

It has been a tumultuous year in virus-ravaged global markets, but investors in Turkey have had more drama to cope with than most.

The lira’s plunge was the steepest in emerging markets after the Argentine peso and regulators caused investor unease with market interventions, including curbs on short selling, that helped to spur record outflows. Geopolitical risks were plentiful too, through Turkey’s stance on eastern Mediterranean energy exploration, and on the conflicts in Syria, Libya and between Armenia and Azerbaijan, and its purchase of a Russian air defense system.

Turkey’s Year of Drama Hands Investors These 2021 Priorities

The biggest jolt of all came in November, with an overhaul of Turkey’s economic management accompanied by a commitment to investor-friendly decision making. After 2020’s multiple plot twists, what the country -- and investors -- need next is strong economic policies, good international relations and central-bank independence, said RAM Capital SA money manager Ogeday Topcular.

“Even if these things happen, it would be a long-term process and continuous effort to undo the damage to credibility,” Topcular said. “2021 will be mostly about follow-on actions after the latest promises.”

Here are some areas of key concern for money managers and strategists in 2021:

Central-Bank Policy

President Recep Tayyip Erdogan promised to restore investor confidence after the departure of his son-in-law and economy czar Berat Albayrak and the ouster of central bank governor Murat Uysal, even if this meant swallowing “bitter pills.”

That spurred a rally in Turkish assets, but investors will remain skeptical in the near-term and want to see continued “action rather than words,” as macro imbalances remain a concern, according to Paul Greer, a money manager for Fidelity International in London.

The central bank’s new governor, Naci Agbal, on Wednesday said he’d tighten policy when warranted by price developments.

Investors are wary of the U-turns seen in Turkish monetary and fiscal policy in recent years, said Cristian Maggio, head of emerging markets at TD Securities in London. The central bank may raise interest rates further in a conventional response to inflation. But, “eventually, I believe President Erdogan will try to reset monetary policy” to be accommodative and pro-growth, even if this threatens long-term price stability, Maggio said. He predicted investors could notice a change in policy direction in the second half of 2021.

Rebuilding Reserves

Turkey has spent its foreign-currency holdings faster than any other major developing economy this year, and their decline to a 15-year-low has been at the heart of the lira’s slump. A recovery requires either higher interest rates or bullish sentiment spurring foreign capital inflows.

Turkey’s Year of Drama Hands Investors These 2021 Priorities

Turkish authorities may focus on rebuilding reserves during periods of lira strength and on repairing trust with investors through pared-back regulation in a bid to attract portfolio funds, said Phoenix Kalen, director of emerging-market strategy at Societe Generale SA in London.

A key element of next year’s policy mix will be to amass foreign reserves without destabilizing the lira, Agbal said on Wednesday. A detailed plan on how and when reserves can be rebuilt will be unveiled later, he said.


Inflation has remained in double digits throughout the year, thanks to the weak lira, and climbed more than expected in November, ramping up pressure on Agbal to persist with tighter monetary policy.

“Inflation remains a thorn in the flesh, and central bank independence is also one thing no one should take for granted,” Maggio of TD Securities said. “We’ll be closely monitoring how good it will be in leading inflation back toward the target.”

Turkey’s Year of Drama Hands Investors These 2021 Priorities


Closely connected to the bugbear of inflation is Turks’ preference for dollar-based assets to protect their savings. By Dec. 4, Turkish residents’ foreign-exchange deposits had risen by almost 19% this year to $231 billion, according to central bank data. That follows a 20% jump in 2019, even as Erdogan urged citizens to use local currency for transacting and investing.

With a new economic team in place and optimism about improved global risk sentiment, there is one more thing that could help the local currency, said Rabobank strategist Piotr Matys. “The missing component that would provide the lira with a stronger bullish momentum would be profit-taking on long U.S. dollar positions among Turkish households and companies,” he said.

However, Turks are unlikely to relax their grip on hard currency for as long as they have doubts over the stability of government policies, said Mehmet Gerz, chief investment officer at Ata Portfoy.

U.S.-Turkey Relations

A bigger falling out that worsens relations between Ankara and Washington could “scupper the benefits a more orthodox monetary policy brings,” said Henrik Gullberg, emerging-markets macroeonomist at Coex Partners Ltd. in London.

Ties between the NATO allies have been strained by Turkey’s Russian S-400 missile system purchase, the jailing of a U.S. pastor, U.S. sanctions announced this week, and a New York criminal case against a state-owned Turkish bank. President Donald Trump and Erdogan seemed to be on good terms until the latter signed off on measures against Turkey.

President-elect Joe Biden has called Erdogan an “autocrat” and said the U.S. should back opponents seeking to oust him at the ballot box. Even so, Rabobank’s Matys is among those who don’t expect Biden to immediately adopt a hostile stance.

“It is reasonable to assume that at the very beginning of his presidency Biden will give diplomacy one more chance,” Matys said.

Vaccine and Tourism

Foreign tourist arrivals plunged by more than 70% in the first 10 months of 2020, according to tourism ministry figures. Good news on Covid-19 and its treatment is badly needed, said Onur Ilgen, head of Treasury at MUFG Bank Turkey. “The effective use of vaccines and the slowdown of the pandemic will be critical factors for the macroeconomy,” he said.

The availability of vaccines may not save the next tourism season, “but there is a potential for an upside surprise,” said Viktor Szabo, a senior fixed-income manager at Aberdeen Asset Management in London.

©2020 Bloomberg L.P.

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