Wary Turks aren’t buying President Erdogan’s economic promise yet

Turkish President Recep Tayyip Erdogan’s promise of a new economic era triggered a foreign-driven rally in the lira, but local investors have yet to be persuaded that policies they say have dragged on economic prospects for years will be reversed.

Interviews with local portfolio managers, gold sellers and business owners suggest Erdogan’s biggest challenge will be convincing Turkish individuals and companies he can turn last month’s rhetoric of market-friendly reforms into reality.

“There is a protective reflex”, built up after years of lira depreciation, said Baris Hocaoglu, general manager of Istanbul Portfoy, which manages 7 billion lira ($900 million) of assets and recommends a “cautious stance” to clients.

“Until the trust and stability are established, especially individual investors’ interest in gold and foreign exchange (FX) will continue.”

Local wariness also reflects other risks, including the resurgent coronavirus pandemic and signs of friction within Erdogan’s government that could worsen.

Turks have faced mostly double-digit unemployment and inflation for four years. Twice since mid-2018 the economy has sharply contracted while half the lira’s value has evaporated, setting both back compared to peers.

Early last month, convinced by allies his economic policies were failing, Erdogan installed a new central bank chief who hiked interest rates to 15 percent to boost the record-low currency.

Foreign investors, who hold only 5 percent of Turkish bonds, then chased some of the highest yields in emerging markets, pushing the lira 12 percent higher. That rally was partially reversed by Turks, who still face negligible deposit rates, buying $4 billion of gold and foreign exchange in two weeks.