Foreign capital flight continues
The Central Bank has been successful in calming, even reducing, foreign exchange rates through raising the interest rate and other tightening measures. Now the question is whether the rates will stabilize. This balance will be determined by the willingness of non-residents to return to Turkey.
Deputy Prime Minister Mehmet Şimşek and Central Bank Chairman Murat Çetinkaya say that the presentations they made in London were very effective. Why did they wait so long and why was such a rate hike necessary if such presentations were useful in attracting non-residents? It’s one thing to fool others but much worse for societies to fool themselves. We can’t attract foreign funds to Turkey with such presentations nor can we stop the outflow with a tweet from a policymaker. Let’s be realistic. Our ammo was the interest rate and we used it. So let’s hope that will work and non-residents will come back to Turkey.
F ve-month p cture s depress ng
According to data released by the Central Bank on May 31, non-residents sold $914 million worth of stocks and bought $290 million worth of government debt securities. So the net outflow was $624 million.
When we compare this figure with the previous year, we can clearly see how non-residents avoid the Turkish market. Non-residents brought $4.8 billion in the first five months of 2017. The previous year, there was an inflow of $3.3 billion. The first five months of 2014 and 2015 were election periods with net outflows from non-resident investors.
This year, the first five months don’t reflect a dramatic outflow but when you analyze the figures month by month, the outflow of over $1.1 billion in May stands out. On top of that, $1 billion of that is from government debt securities. In fact, non-residents only sold their government debt securities during each week of the month, and bought none.
D d nflow start?
The Central Bank first raised the interest rate by three points. Then the main channels were opened for use and the upward boundary of the late liquidity window funding interest rate was raised to 19.50 percent.
Now after these measures, it is expected that foreign funds will be attracted again to Turkish assets. Presentations abroad indeed have a role but foreign investors are first and foremost interested in what their returns will be; secondly, they are interested whether this return can be achieved. And foreign investors also want interest rates to stop somewhere.
A paper bought for TRY 85 with a 15 percent interest rate will decline to TRY 80 lira when the interest rate soars to 20 percent. Why would a foreign investor take a risk like that?
So everyone needs interest rates to be predictable and foreign rates to move without many fluctuations. Foreign rates being too high is not a concern for foreign investors; on the contrary, when foreign rates are high, it suits their books and they bring foreign exchange and convert to TRY to generate a return. Their concern regarding the foreign rates is extreme fluctuations.
We will see the figures for last week soon. If we don’t see an end to non-resident flight, it will be hard for us to stop this outflow.