Foreign investors look set to keep pulling their money out of Turkey after dumping a record amount of stocks and bonds this year.
Investors from abroad withdrew $7.6 billion from assets in 2015, including $1.4 billion in outflows last month as the party that President Recep Tayyip Erdogan helped found swept back into power, initially triggering a rally in the nation’s assets. Declines resumed as the war in neighboring Syria and Russian sanctions threatened the country’s $720 billion economy.
More selling will probably follow and a rout in the lira, on course for the biggest annual drop since 2008, is set to deepen, according to Capital Economics Ltd. and SEB AB. In addition to Turkey having the biggest current-account deficit as a percentage of output among the Group of 20 nations, concern is mounting that the new government’s overwhelming win in elections last month will allow it to put pressure on the central bank to cut rates with little political opposition.
The yield on 10-year debt rose eight basis points to 10.36 percent at 5:04 p.m. in Istanbul, bringing the increase in the past month to 51 basis points, the biggest among 24 emerging markets. The lira weakened 0.6 percent to 2.9088 against the dollar.
A key question for investors is how free central bankers will be to set their policy agenda given President Erdogan’s track record of pushing for lower borrowing costs even as inflation accelerated and the lira weakened. They’re are also looking for evidence the government will adopt policies to improve competitiveness and stimulate growth from levels that are below the 10-year average.
Not everyone is pessimistic. Credit Suisse Group AG recommended investors boost their holdings in Turkish stocks last week after a selloff that dragged down valuations.