The danger of 'hot money' brought by high interest rates: 'It can flee as quickly as it arrived'
As the flow of foreign hot money into Turkey has accelerated in recent months due to high interest rates, a notable analysis published in the British newspaper Financial Times has issued warnings.
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Speaking to the British newspaper Financial Times, foreign fund managers and a Turkish economic official warned that the hot money recently flowing into Turkey due to high interest rates could exit rapidly in the event of a sudden global or local shock.
The analysis, titled "Traders are pouring billions of dollars into the Turkish lira," emphasized that while funds are turning to Turkey to take advantage of high interest rates, this situation could leave the country vulnerable to sudden market shifts.
CARRY TRADE FLOWS AND TURKEY'S SITUATION
The report highlighted the 'carry trade' flow—a strategy of borrowing at low costs to invest in currencies with high returns—and noted that the Turkish lira has gained 18 percent against the US dollar since the beginning of the year. It was stated that a total of $24 billion in carry trade-focused funds has flowed into Turkey since October 2023, with $12.5 billion in foreign inflows into Turkish lira bonds over the past year.
FAST MONEY AND INVESTOR CONFIDENCE
The analysis warned that a large portion of the inflows into Turkey consists of "fast money," which could lead to a rapid exit in the event of a potential shock. Kieran Curtis from the investment firm Abrdn stated, "The share of fast money in these types of transactions is increasing, which makes it more prone to reversal."
A Turkish economic official shared similar views, acknowledging that external shocks could drive volatile investors away from Turkish markets.
RISKS FOR LOCAL SAVERS
Hedge fund managers pointed to the risk of local savers losing confidence in the Turkish Lira, alongside the interest in Turkey.
While it was stated that the increase in the Central Bank of the Republic of Turkey's (TCMB) reserves could provide protection against foreign hot money outflows, it was noted that large-scale foreign direct investments have not yet materialized.
Charlie Robertson, head of macro strategy at FIM Partners, stated that Mehmet Şimşek could offer predictability to investors, but the results of this might only be seen within a few years.