The Central Bank of Turkey has hit the ground running since Turkiye’s June election result. New Treasury and Finance Minister Mehmet Şimşek and Central Bank Governor Hafize Gaye Erkan have been hard at work at aggressively tackling the Turkish economy’s most pressing issues, which include continued fostering growth while curbing inflationary effects on the Lira and market at-large. Meanwhile, some of the world’s leading financial institutions have been keenly watching these moves from afar reading entry into a new economic environment for one of the world’s oldest powers.
Institutional Opinion: A Confluence of Positive Signals
Recent shifts in Turkey's economic policy have garnered attention from some of the world's leading financial institutions. Goldman Sachs, the European Bank for Reconstruction and Development (EBRD), and Standard & Poor's (S&P) have all weighed in, offering insights that are particularly relevant for foreign real estate investors eyeing opportunities in Turkey.
Goldman Sachs: Türkiye 'Back in the Game'
Goldman Sachs recently released a report titled "Türkiye is back in the game," highlighting the country's aggressive monetary tightening as a pivotal strategy to combat inflation and stabilise the lira. The Central Bank of Turkey has tripled its benchmark one- week repo rate to 30% and has expressed readiness to raise rates further if needed.
Goldman Sachs predicts that if the policy interest rate reaches 40% or above by year- end, Turkey's real rates would turn positive, surpassing the inflation forecast for the next 12 months. This could reignite interest among foreign investors, particularly those involved in carry trade—a strategy where investors borrow in low-interest-rate currencies to invest in higher-yielding ones.
EBRD: Upward Revision and Foreign Capital Inflow
The EBRD has revised its growth outlook for Turkey from 2.5% to 3.5% for 2023. This upward revision is attributed to the fiscal stimulus before the May elections and the post-vote shift in economic policy. The EBRD also noted an inflow of foreign capital, signalling a return of foreign investors and helping rebuild the country's reserves. This is particularly relevant for real estate investors as the inflow of foreign capital often correlates with increased activity in the Turkish real estate sector.
Standard & Poor's: From 'Negative' to 'Stable'
S&P has revised Turkey's outlook from "negative" to "stable," affirming its credit rating at B. The agency cited the Central Bank's aggressive rate hikes and the introduction of indirect taxes by the Treasury as balanced risks that could rebalance Turkey's economy by 2026. This stable outlook could serve as a confidence booster for foreign investors contemplating long-term investments in Turkey's real estate market.
The recent shifts in Turkey's economic policies and the positive outlook from major financial institutions create a compelling narrative for foreign real estate investors. The aggressive monetary policies aim to stabilise the lira, which has weakened significantly against the U.S. dollar, offering a more predictable environment for real estate investments. Coupled with this is the inflow of foreign capital, which could lead to increased liquidity in the real estate market, making it an opportune time for investments. While high interest rates generally discourage borrowing, in this context they could attract foreign investors looking for higher yields in a more stable economic environment. The backing of these policies by President Recep Tayyip Erdoğan and the appointment of technocrats in key economic roles add a layer of policy continuity that could be favourable for long-term investments. However, investors should remain aware of the implementation risks and the inherently volatile nature of economic reforms, suggesting that a diversified investment strategy could be advisable.
Governor Erkan on Balancing Act Between Growth and Inflation
Central Bank Governor Hafize Gaye Erkan recently addressed Turkey's Parliament, outlining the Central Bank of the Republic of Türkiye's (CBRT) commitment to achieving price stability without hampering economic growth. This comes amid a period of aggressive monetary tightening aimed at containing the domestic demand that has been driving inflation.
"We are resolutely utilising all our tools in line with our fundamental goal of price stability, and we will continue to do so," Erkan affirmed.
Official data indicates that annual inflation rose to 61.5% over the 12 months ending in September. However, the month-over-month increase in prices has shown signs of slowing, dropping to nearly 4.8% in September from 9.1% in August and 9.5% in July. Erkan attributed the inflation rate to a variety of factors, including wages, exchange rates, and recent tax hikes.
The Governor also discussed the Central Bank's strategy of implementing monetary tightening in conjunction with simplification within the macroprudential framework. This dual approach aims to strengthen the monetary transmission mechanism and reinforce steps taken to enhance macro-financial stability.
"Our determination to patiently implement a monetary policy that will recalibrate expectations, enhance confidence in the economy, and increase predictability is demonstrated through the steps we have taken," she noted.
For foreign real estate investors, Erkan's statements offer a glimpse into the Central Bank's balancing act. On one hand, the aggressive rate hikes—500 basis points last month to reach a key interest rate of 30%—are designed to rein in inflation. On the other hand, the Central Bank is also focused on not stifling economic growth, which is crucial for a healthy real estate market. Erkan's emphasis on achieving disinflation without compromising growth suggests a nuanced approach that could offer a more stable and predictable investment environment in Turkey.
Notable Future Plans: A Diplomatic Push for Economic Stability
As Turkey continues its aggressive economic overhaul, key figures in the government are taking their message to the international stage. Treasury and Finance Minister Mehmet Şimşek is set to meet with investors in London, following similar meetings in New York and the Gulf states. These meetings are part of a broader strategy to attract international investments and financing to support Turkey's policy shifts. Şimşek, a highly respected policymaker, has been instrumental in reversing the years-long easing cycle and aggressively hiking interest rates to cool inflation and rebuild foreign currency reserves. He recently announced that Turkey had secured $10.4 billion in external financing since June, a significant portion of which has gone to the banking and real sectors.
Parallel to Şimşek's efforts, Central Bank Governor Hafize Gaye Erkan is scheduled to hold her first meetings with international investors at the annual International Monetary Fund (IMF) forum in Marrakech. The meetings will include representatives from major financial institutions like Blackrock, JPMorgan, and Deutsche Bank. This marks a significant milestone as it will be Erkan's first such interaction with foreign banks and funds since her appointment in June. The Central Bank has been on a tightening spree, raising its key interest rate by 500 basis points to 30% in a bid to rein in inflation, which stood at 61.53% in September.
For foreign real estate investors, these diplomatic efforts signal Turkey's commitment to economic stability and openness to foreign investment. The meetings with international investors and financial institutions could potentially lead to increased capital inflows, providing a more liquid and stable environment for real estate investments. Moreover, the government's medium-term program and the policy shifts have garnered significant interest from foreign investors, further enhancing Turkey's credibility on the global stage.
Concluding Thoughts for Foreign Investors Looking at Turkey
In summary, Turkey is undergoing a significant economic transformation, marked by aggressive monetary policies and a shift towards more orthodox economic strategies. Key figures like Treasury and Finance Minister Mehmet Şimşek and Central Bank Governor Hafize Gaye Erkan are actively engaging with international investors to bolster Turkey's economic standing. Major financial institutions like Goldman Sachs, EBRD, and S&P have given positive signals, revising Turkey's economic outlook and affirming its credit ratings.
For foreign real estate investors, this presents a unique window of opportunity. The aggressive rate hikes aim to stabilise the lira and curb inflation, making the investment environment more predictable. The government's diplomatic efforts and medium-term plans indicate a commitment to economic stability and openness to foreign capital.
However, investors should exercise caution and consider the volatile nature of economic reforms and geopolitical considerations.
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