Foreign Investment in Turkey’s Local Debt Markets

By Libby George and Karin Strohecker
LONDON (Reuters) – Foreign investors are returning to Turkey’s local debt markets, encouraged by recent interest rate cuts and decreasing inflation, and anticipating regional changes that could further enhance their investments in the economy.

Turkey’s central bank has reduced rates by 250 basis points to 45%, continuing its easing cycle initiated last month, following efforts to combat years of rising prices and a declining currency.

After President Tayyip Erdogan’s re-election and a shift towards more orthodox economic policies, Turkey is regaining its position as a top draw for emerging market investors. Nick Eisinger, co-head of Emerging Markets at Vanguard, stated, “Turkey is one of the bigger success stories. The reform and macro stories are very positive and still have room to grow.”

Local bonds attracted $1.24 billion in foreign investments in the week to January 17, marking the largest inflow in two months and pushing the 2025 total to $1.9 billion, according to central bank data. Foreign ownership of government debt now exceeds 10%, a level not seen since 2019. This marks a stark rise from 1% in 2022 but remains below the 25% before the lira crisis began in August 2018.

Emerging from the crisis has been challenging. Turkey previously employed unorthodox fiscal and monetary policies leading to significant growth; it ranked first among larger emerging markets in economic growth since the COVID-19 crisis, according to Oxford Economics. However, inflation soared to 85% in 2022 and 75% last year, devastating many investments as the lira reached record lows.

Disinflation

The recent favorable environment has prompted Amundi, Europe’s largest asset manager, to invest in Turkish domestic bonds. Yerlan Syzdykov, global head of emerging markets at Amundi, remarked, “We like Turkey from a local currency perspective.” The recent drop in inflation—44.38% annually in December—coupled with a tight balance of payments, is currently favorable for investors.

A Reuters poll predicts the central bank will continue rate cuts, expecting the key rate to settle at 30% by year-end, with an anticipated inflation decline to around 21%. While the government may prioritize lower growth temporarily, recent regional developments, such as the change in Syrian leadership and the Israel-Hamas ceasefire, could enhance Turkey’s growth prospects, according to analysts.

Magda Branet, head of emerging markets at AXA Investment Managers, noted that recent Middle Eastern events are likely beneficial for Turkey, hinting at a role in regional reconstruction efforts.

Despite these promising indicators, Turkey still faces challenges in reassuring so-called crossover investors—those from developed markets willing to engage with emerging markets—who remain hesitant due to geopolitical risks and institutional stability concerns. Amundi’s Syzdykov remarked, “It’s too risky to go into Turkey because of these factors.”

This story has been amended to include ‘AXA Investment Managers’ in paragraph 17.