More selling will probably follow and a rout in the lira, on course for the biggest annual drop since 2008, is set to deepen

Bloomberg
Istanbul

Foreign investors look set to keep pulling their money out of Turkey after dumping a record amount of stocks and bonds this year.
Investors from abroad withdrew $7.6bn from assets in 2015, including $1.4bn in outflows last month as the party that President Recep Tayyip Erdogan helped found swept back into power, initially triggering a rally in the nation’s assets. Declines resumed as the war in neighbouring Syria and Russian sanctions threatened the country’s $720bn economy.
More selling will probably follow and a rout in the lira, on course for the biggest annual drop since 2008, is set to deepen, according to Capital Economics Ltd and SEB AB. In addition to Turkey having the biggest current-account deficit as a percentage of output among the Group of 20 nations, concern is mounting that the new government’s overwhelming win in elections last month will allow it to put pressure on the central bank to cut rates with little political opposition.
“Markets have indeed welcomed the recent election, but I think they may be overly sanguine,” said William Jackson, senior emerging-markets economist at Capital Economics Ltd in London. High levels of external debt make it vulnerable to shifts in investor sentiment once the US starts increasing interest rates, weighing on the lira and bonds, he said.
Per Hammarlund, chief emerging-markets strategist at SEB in Stockholm, projects the lira will drop 3.7% to 3 per dollar by the end of December. Jackson at Capital Economics forecasts a decline of 11% by the end of next year to 3.25, worse than the 3.08 median estimate in a Bloomberg survey.
A key question for investors is how free central bankers will be to set their policy agenda given President Erdogan’s track record of pushing for lower borrowing costs even as inflation accelerated and the lira weakened. They’re are also looking for evidence the government will adopt policies to improve competitiveness and stimulate growth from levels that are below the 10-year average.
“Foreign investors are not convinced that Turkey’s central bank will be allowed to decide on monetary policy independently,” Hammarlund said. The strong showing by the ruling party in elections risks exacerbating the situation, he said.
Not everyone is pessimistic. Credit Suisse Group recommended investors boost their holdings in Turkish stocks last week after a selloff that dragged down valuations.
The slump in oil prices this year helped Turkey post current-account surpluses in August and September, the first back-to-back positive flows since 2004. That will help narrow this year’s shortfall to an estimated 5% of economic output.
Even so, Turkey is among emerging markets with rising private-sector debt, increasing the dependency on external financing and threatening sovereign credit ratings, Fitch Ratings has said in a report. Moody’s Investors Service cited Turkey’s “large external funding needs” and geopolitical risks among reasons for keeping a negative outlook on the country’s credit rating.
Fitch and Moody’s rate Turkey at the lowest investment grade, and Standard & Poor’s ranks the sovereign one step below in junk.
“There are still many open questions about the future economic and reform programs,” said Dmitri Barinov, a money manager overseeing $2.6bn for Union Investment Privatfonds in Frankfurt, who has small underweight in Turkey. “If Erdogan tries to stimulate growth via lower rates, it will prevent the current-account deficit from improving further and will only lead to a deterioration of the situation in the banking system. We need more clarity.”