Tensions in trade and politics weigh on Turkish money markets

$8.5bn of Turkish debt sold

Lira at 38 to the dollar

Inflation falling slightly

Political instability in Turkey and tariff-driven global trade tensions are weighing on Turkish money markets as international investors move out of local debt and locals buy up foreign currency.

In the three weeks ending April 4, non-resident investors sold $8.5 billion of Turkish debt, according to a report released by the central bank last week. 

On April 2 US President Donald Trump announced a near tripling in US tariffs to their highest in more than a century, leading to a sharp sell-off in global stocks and other assets.

Filiz Eryılmaz, chief economist with brokerage company ALB Yatırım and associate professor of economics at Uludağ University, said there are two fundamental concerns causing foreigners to step back from Turkey.

“One is political developments; could they flare again, and take on another dimension,” Eryılmaz told AGBI. “And then there are questions as to why the problem of inflation was not resolved and so is Turkey capable of fighting inflation?”

There was also a move away from the Turkish carry trade, with official data showing an outflow in currency swaps with local banks of $11 billion from March 19 to April 4, taking the total swap arrangements down to $28.5 billion. 

In this instance, carry trading involves borrowing currency in low-yield foreign economies to convert to the Turkish lira to reap the reward of higher Turkish interest rates.

March 19 was the date of the detention and subsequent charging of Istanbul mayor Ekram İmamoğlu, a senior opposition figure and rival to President Recep Tayyip Erdoğan, over allegations of corruption and abuse of office. 

İmamoğlu’s arrest sparked widespread protests across the country and destabilised markets, with the Istanbul stock exchange down as much as 12 percent in the days after his detention. Though it has recovered some of its losses, the main index is still down almost 10 percent.

As foreigners lost some of their appetite for Turkish bonds, Turks became increasingly hungry for foreign currency. 

In the three weeks ending April 4, domestic holdings of foreign currency increased by $8.8 billion, the central bank report said, suggesting efforts by the government to reduce dollarisation in the economy have stalled.

The day İmamoğlu was detained, the lira briefly fell from 36 to 42 to the dollar, changing the perception that the government was able to keep the currency stable, said Eryılmaz. 

Although the central bank intervened to push the lira up to 38 against the greenback, a level it has since maintained, local political uncertainty and global trade tensions have markets wondering if inflation will come down and if there could be early elections, she said.

Presidential elections are not due until 2028.

Turkey’s annual inflation rate dropped to 38.1 percent in March, down from February’s 39.1 percent, according to the Turkish Statistical Institute. 

This was below analyst estimates of 38.9 percent, while also marking the 10th consecutive month of falling inflation. It was also the lowest number since December 2021.

“With recent developments – the gains on the inflation front have stalled, and the demand for foreign currency increased – they look at all these factors,” Eryılmaz said.

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