Turkey sees record exit of portfolio investment as central bank chief fired
Turkey experienced a record loss of portfolio investment in March, when President Recep Tayyip Erdoğan sacked the chief of the central bank and brought in a more dovish replacement.
The investment outflows from the country totalled a net $5.7 billion, the central bank said on Tuesday when reporting monthly current account data. That was the biggest loss since records began in the early 1990s.
The central bank’s foreign exchange reserves fell by $6.17 billion as it sought to defend the lira against a selling spree, the data showed.
Foreign investors have fled Turkish markets over the past year as the central bank kept interest rates at low levels to help the government engineer a borrowing boom, which sucked in imports and widened the current account deficit to 5.1 percent of GDP. The bank was forced to spend tens of billions of dollars of its foreign currency reserves defending the lira as capital exited, leaving net reserves deeply in negative territory.
Some investors had returned to Turkey in November, when former central bank governor Naci Ağbal began his four-month term. He raised interest rates to 19 percent from 10.25 percent and pledged tighter monetary policy, if required, to slow double-digit inflation.
The lira traded down 0.4 percent at 8.3 per dollar on Tuesday, near a record low of 8.58 per dollar reached just before Ağbal's arrival.
Şahap Kavcıoğlu, Ağbal’s replacement, has sympathised with Erdoğan’s aversion to high interest rates, raising fears among investors that the central bank will cut rates despite elevated inflation rates.
Inflation in Turkey accelerated to 17.1 percent in April from 16.2 percent the previous month. That was the highest level in major emerging markets after crisis-hit Argentina.
The central bank has kept the benchmark interest rate at 19 percent since the arrival of Kavcıoğlu, who says inflation probably peaked last month and will decline markedly in the second half of the year. Unlike his predecessor, Kavcıoğlu has declined to say whether he is prepared to raise interest rates if needed.
The central bank said that the March current account deficit narrowed by $2.12 billion from the same month of 2020 to $3.33 billion. The 12-month rolling deficit stood at $36.19 billion, or just over 5 percent of GDP reported for 2020.