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What awaits Turkey's economy as its foreign exchange woes ease?

After the March local polls, Ankara will be free of major domestic political concerns and is expected to enact a stern program to cool the economy and make real progress in fighting inflation.
Turkish Treasury and Finance Minister Mehmet Simsek (C) addresses a statement to the journalists at the party's group meeting at the Turkish Grand National Assembly (TBMM) on June 21, 2023. (Photo by Adem ALTAN / AFP) (Photo by ADEM ALTAN/AFP via Getty Images)
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A combination of factors helped Turkey ease its foreign-currency woes during the summer, but the problem could resurge in the coming months as Ankara balks at unpopular measures ahead of local elections in spring. 

Decreasing uncertainty after the presidential and parliamentary elections in May laid the ground for foreign-currency assets held abroad or “under the pillow” to flow into the formal economy. That confidence was increased after Mehmet Simsek, an economist highly regarded among international investors, took the reins of the economy in June. According to central bank data, such inflows — recorded under “net errors and omissions” in the balance of payments — totaled about $16 billion in the four months from June through September. 

In the same period, foreign investors put about $5 billion in Turkish stocks and sovereign bonds, while inflows in the form of bank deposits and loans totaled some $9.5 billion. Foreign direct investments were the weakest link. While real estate sales brought in $930 million, actual direct investments saw an outflow of about $630 million.

All in all, foreign inflows amounted to nearly $15 billion in the first four months under Simsek’s economic leadership, with the figure reaching some $31 billion including “net errors and omissions,” known also as inflows from unknown sources. That sum easily covered the $3.4 billion current account deficit in the June-September period, leading also to a $27 billion increase in the country’s foreign reserves.

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