Trust Eroded: Market Reactions Following Political Turmoil

Trust in economic stability can take years to build but can be undermined almost overnight. Turkey faces a new challenge as political unrest returns, specifically with the recent detention of the president’s primary political opponent. This event is likely to diminish the hard-earned confidence that international investors had started to regain following a tumultuous economic period marked by President Recep Tayyip Erdoğan’s unconventional policies.

Market Metrics: A Dramatic Sell-off

In response to this distressing news, the Turkish lira experienced a drop exceeding 10%, although it later recovered slightly. The BIST 100 index saw a significant decline, falling by 9%, marking the worst performance of its local currency bonds since the beginning of 2023.

Recent Investor Trends: Encouraging Signs Prior to Turmoil

Before this setback, there had been positive trends for international investors, who had markedly increased their stake in Turkish assets. Between March 2022 and March 2023, foreign investment in Turkish bonds and stocks surged by 50%, amounting to approximately $54 billion—more than triple the figure from the previous year.

Factors Driving Foreign Investment

Several factors contributed to increasing foreign involvement in Turkish markets, including:

• An improving economic outlook following a shift to more traditional economic policies post-2023 elections.
• Robust economic growth alongside a significant decrease in inflation from its peak of over 85%.
• Turkey’s strategic role in international affairs, including ongoing negotiations with Kurdish insurgents and its mediation efforts in Ukraine and Syria.

Potential Impacts of Political Instability

The recent developments pose risks to maintaining the economic momentum that Turkey has been experiencing. A depreciated lira complicates efforts to control inflation, adversely affecting the economic landscape.

The Role of Political Stability in Economic Confidence

In emerging markets, politics profoundly influence investor confidence. Turkey’s respected Finance Minister, Mehmet Şimşek, has made efforts to assure investors that the government will remain committed to its current economic and monetary policies.

Nevertheless, past experiences have left investors wary. Concerns linger over the potential for Erdoğan to revert to low interest rates and political maneuvering at the expense of economic reforms. A government that has sustained itself for more than two decades does not guarantee stability, and worries about a return to authoritarian tactics could further erode trust.