T
urkey is paying the price for its pre-election efforts to tinker with the markets. As a controversial vote rerun looms, a barrage of interventionist policies by President Recep Tayyip Erdogan’s government has backfired, starving the economy of investment, fuelling demand for foreign currency among households and businesses and further undermining the lira.
Despite repeated assurances that capital controls aren’t an option, Turkey has sought to stabilise its currency by reintroducing a tax on foreigncurrency sellers and imposing a settlement delay for purchases by individuals of more than $100,000.
“I can’t see any significant flows returning until policymakers become more marketfriendly,” said Win Thin, global head of currency strategy at Brown Brothers Harriman & ■ Co. “Turkey has already shown that it doesn’t care if real money can’t hedge properly.”
To stem a run on the currency without resorting to another interest-rate hike before March elections, authorities made it harder for foreign investors to access lira funding while squeezing the local bond market and leaning on state banks to keep borrowing costs low.
While the measures briefly kept the lira in check after an unexpected drop in central bank reserves, they left investors in a bind: unable to access lira funding to maintain their positions, some foreign investors dumped stock and bond holdings. Others balked at the prospect of runaway inflation.
Since the squeeze, foreign investors have withdrawn close to $2.5 billion from Turkish capital markets, taking this year’s exodus to a net $1.8 billion, the most since 2015.
That’s piling further pressure on the lira, which slumped to a fresh eight-month low against the dollar this month. The currency is continuing to depreciate after wobbling on Tuesday when the central bank rolled back a limited tightening of policy it delivered almost two weeks ago.
Local-currency borrowing
The government has also suppressed local-currency borrowing to keep yields in check — it hasn’t sold a 10-year bond in almost a year despite a ballooning deficit. Instead, it’s loaded up on short-dated lira and foreign-currency debt.
With the central bank’s reserves