Foreign investors are remaining cautious about Turkish assets, even after the central bank committed over $25 billion to stabilize the lira amid a sharp plunge in its value. Despite this massive intervention, which has been instrumental in restoring some level of confidence, there are concerns that President Recep Tayyip Erdoğan could potentially fire the central bank governor and finance minister, who have been key in stabilizing the country’s finances.
The Turkish central bank, which had successfully rebuilt the country’s net foreign reserves from a deficit to about $65 billion over the past year, had to intervene dramatically after the lira dropped to a record low of more than 40 to the US dollar. The swift $25 billion intervention came amid rising political tensions, including the detention of Ekrem İmamoğlu, the mayor of Istanbul and a prominent opposition leader. His arrest sparked widespread protests and mass arrests, amplifying the economic uncertainty.
The intervention was seen as a necessary step to halt the lira’s freefall and reassure markets. Central bank governor Fatih Karahan and finance minister Mehmet Simsek have been credited with helping stabilize Turkish markets, particularly in the face of significant foreign capital outflows. By the end of the week, the lira had stabilized at around 38 to the dollar, but investor sentiment remains fragile. A Turkish official noted that foreign investors had pulled out roughly $16 billion, though policymakers believe that “the worst may be behind them.”
However, despite efforts to reassure the market, many investors remain wary of political risks, particularly the possibility that Erdoğan could dismiss Karahan and Simsek, who have spearheaded a more market-friendly economic strategy since their appointments following the 2023 elections. The latest economic turmoil has reignited fears that a rush to dollars could overwhelm the central bank’s resources, putting Turkey’s finances at further risk.
The rapid depletion of reserves to manage foreign outflows is concerning for many analysts. Mohammed Elmi, a portfolio manager at Federated Hermes, warned that if such heavy intervention continues for an extended period, it could be difficult for Turkey to maintain stability without additional measures. While the intervention has managed to stabilize the currency temporarily, it is unclear how long Turkey’s policymakers can sustain this level of support.
In the midst of the financial crisis, Erdoğan has tried to shift blame onto the opposition, accusing them of “economic sabotage” and pledging his full support for the central bank’s actions. Both Simsek and Karahan spoke to investors on a conference call, reassuring them of their commitment to stabilizing the lira. Carlos de Sousa, an emerging market debt manager at Vontobel, praised their efforts to rebuild Turkey’s reserves, though he acknowledged that the pace at which reserves were burned in the last week could have significant economic costs.
A key factor in Turkey’s current economic situation is the so-called “carry trade,” where investors borrow in currencies with lower interest rates, such as yen or dollars, and invest in higher-yielding Turkish assets. JPMorgan estimates that the size of this carry trade is around $35 billion. Turkish authorities have used the high interest rates—reaching up to 50%—to attract investors, but as the lira’s value fell sharply, hedge funds leveraged in these trades were among the first to exit, exacerbating the lira’s decline.
Brad Setser, a senior fellow at the Council on Foreign Relations, noted that much of the carry trade had been unwound during the recent market turmoil, which should reduce the need for future interventions on the scale of the past week. Still, the country may face challenges if another large wave of foreign capital exits.
One of the main concerns for investors is the risk that Turkish locals could start “dollarizing” again—shifting their savings into more stable currencies like the dollar, which could undermine confidence in the Turkish lira. Yvette Babb, an emerging market debt manager at William Blair, said that while the central bank’s interventions have provided some reassurance, investors are still anxious about the possibility of further political instability.
Simsek noted that two-thirds of the capital outflows in the recent crisis were attributed to foreign investors, with local retail investors accounting for a much smaller portion. However, some investors worry that the political unrest following İmamoğlu’s arrest could fuel further instability. Bradley Wickens, the chief investment officer at Broad Reach, an emerging markets hedge fund, suggested that the political situation could negatively impact investment sentiment if it leads to sustained opposition campaigns or deteriorating democratic governance.
While Simsek and Karahan did not directly address the political situation during their investor call, their participation was seen as a sign that Erdoğan is, for now, committed to keeping them in place. However, their continued tenure remains uncertain, especially given Erdoğan’s history of removing central bank governors when economic challenges intensify.
Investors have noted that while the current economic crisis has been difficult, there is still hope that Turkey can stabilize in the long run—if the government continues its current course. However, as Babb pointed out, there remains a “tail risk” that Erdoğan could eventually abandon the market-friendly policies of Simsek and Karahan, which would severely undermine investor confidence.
Federated Hermes’ Elmi argued that the risk of Erdoğan returning to his earlier unorthodox economic policies was small, but such a move would be a significant setback for Turkey. Replacing the current economic leadership could lead to a loss of the progress Turkey has made, with net reserves currently insufficient to withstand another large-scale crisis.
