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After Turkey’s giant rate hike, foreign investors mull return: report

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Turkey’s latest massive interest rate hike has caught the attention of long-skeptical foreign investors who say they could return to Turkish assets if authorities continue to demonstrate that a return to orthodox monetary policy is underway, according to Reuters.

The lira rallied as much as 7 percent on Thursday after the central bank shocked the market by lifting its key rate by 750 basis points to 25 percent — three times the size of the expected move.

Turkey’s top officials say they plan to take two more vital steps to reverse a years-long exodus of foreign investment as well: They will publish a comprehensive economic program next month that will reduce uncertainties, and they will begin holding meetings with investors abroad.

Finance Minister Mehmet Şimşek will kick off the investor roadshow on Sept. 19 at Goldman Sachs headquarters in New York, Reuters reported on Friday.

Though the tide may be shifting, persuading investors will not be easy. Foreigners had all but abandoned Turkey over the last five years of President Recep Tayyip Erdoğan’s unorthodox and often erratic policies, which included slashing interest rates in the face of soaring inflation.

Yet five foreign investors told Reuters that this week’s rate hike signaled a new independence among policymakers who are serious about addressing unrelenting pressure on the currency and reining in inflation expectations.

“It feels like they are correcting the mistakes they made with their first rate hike decisions,” said Viktor Szabo, portfolio manager at abrdn in London. “And it is a sign that the pressure continued on the currency.”

Ola El-Shawarby, deputy portfolio manager for Emerging Markets Equity Strategy at Van Eck, said: “We have some exposure and we are getting more comfortable with the overall picture so we are getting more constructive.”

“The more proof we get of the return to orthodoxy the more likely we are to revisit these investments,” she said.

Erdoğan question

Faced with badly depleted FX reserves and other economic strains, Erdoğan, fresh from winning re-election in May, appointed Şimşek and picked as central bank governor former Wall Street banker Hafize Gaye Erkan — the first woman to run the central bank — to turn things around.

Vice President Cevdet Yılmaz told bankers that next month’s “medium-term program” will detail a transition to increased economic and financial predictability and include three-year macro forecasts. The investor roadshow will also accelerate, he added.

Şimşek has stressed his team has political support for its plan, which should see inflation begin to cool around May of next year.

Erdoğan, who has fired four central bank chiefs in four years, has said little about the rate hikes.

“They will have to raise policy rates further in this cycle to have a lasting effect on international investors,” said Blaise Antin, head of EM sovereign research at asset manager TCW in Los Angeles.

“The question is whether they have Erdogan’s green light to keep going.”

The central bank said on Thursday it would hike rates more as needed, and JPMorgan predicted they will hit 35 percent by year-end.

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