(Bloomberg) -- A combination of high interest rates and a predictable currency have made Turkey an unusually safe bet for foreign investors, but criticism of that mix is growing as exporters lose business and the economy slows.
While the Turkish lira has fallen more than 10% against the dollar so far in 2024, the worst performance among all peers after the Argentine peso, active trading by state banks has kept the depreciation steady and below the monthly inflation rate. That means the lira’s appreciating in real terms and leaves Turkish goods more costly when priced in other currencies.
When foreign inflows intensified, the state-run lenders stepped in to purchase hard currencies, according to traders who asked not to be named, citing policy. Over the past week, though, they’ve been selling dollars to defend the lira at around 33.09, the traders said.
Turkey’s state banks don’t comment on interventions in the foreign-exchange market.
Real appreciation of the currency, combined with sky-high borrowing costs, is hurting business, according to Mustafa Gultepe, head of the Turkish Exporters’ Assembly, or TIM, who says the currency needs to fall by about 12% to restore competitiveness. The overvalued currency also means Turkey’s lost its advantage in tourism, Marti Hotels & Marinas deputy chairman Emre Narin said in an interview this week with CNBC-e TV.
Export and industrial production figures are meanwhile flashing a slowdown in the economy. That’s on the back of the biggest drop in sales in real terms for Turkey’s top 500 industrial companies since 2009 last year, with a decline of 13.8%, according to the Istanbul Chamber of Industry.
“As we have been warning, the real effective exchange rate has risen sharply in the last year, putting pressure on exports,” said Tufan Comert, an emerging-market strategist at BBVA in London. “We expect authorities to let the lira slide more going forward,” while still preserving real appreciation because it’s important in the fight against inflation, he said.
In an interview with Bloomberg last week, central bank Governor Fatih Karahan said real appreciation in the lira was an outcome of policies to fight inflation, and not a policy goal on its own. The central bank projects inflation will almost halve to 38% by the end of this year before slowing to 14% in 2025 and 9% the following year.
Foreign investors have poured billions of dollars into Turkish assets this year, with many positions banking on real appreciation in the currency. Popular methods to do so include buying forward contracts, the carry trade — which involves borrowing in currencies abroad and putting the money into Turkish lira assets — or holding shorter-term bonds.
Bank of America strategists have calculated that positioning in Turkish lira forwards could now exceed $20 billion.
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