Latest / The Emerging Markets Podcast with Fexingo: Developing Economies, Growth, and Investment / How Turkey Rebuilt Its Economy After 2023 Elections
Transcript
- Lucas: Turkey's economic policy used to be the punchline of emerging market investing — unorthodox rate cuts while inflation was surging. But since mid-2023, there has been a complete 180, and it's actually working. Luna: Right — the old playbook was cut rates to stimulate growth, even as the lira cratered. Now they've hiked the policy rate from 8.5 percent to 50 percent. That is a massive swing. Lucas: Exactly. And the outcome, as of June 2026, is that inflation has fallen from a peak of about 85 percent to around 38 percent. The lira has stabilized — not strengthened, but stable — and foreign investors are starting to come back in. Luna: So what actually changed? Was it just new central bank leadership after the election? Lucas: That is the proximate cause. After President Erdogan won re-election in May 2023, he appointed Hafize Gaye Erkan as central bank governor — a former Wall Street executive — and then replaced her with Fatih Karahan in early 2024. Both have been orthodox. They abandoned the unorthodox view that high rates cause inflation. Luna: And the market rewarded that credibility. I remember Turkish bonds were trading at distressed levels in 2022, now they're converging with other emerging markets. Lucas: The trade-weighted US dollar index is still elevated at 119.5 as of last week, which puts pressure on all EM currencies. But the lira has actually held up better than many peers over the past twelve months. That is a big vote of confidence. Luna: Let's talk about the real economy. Tourism is booming — something like 60 million visitors last year. Exports are also strong because Turkish manufacturers had already adjusted to a weaker lira years ago. Lucas: Right. The export sector has become incredibly competitive. Turkish white goods, textiles, even defense — they've been winning market share in Europe and the Middle East. GDP growth was around 4 percent last year, which is solid for a country that went through a currency crisis. Luna: But the cost of this stabilization is that borrowing costs are sky-high. Mortgage rates are above 30 percent. Domestic consumption has cooled sharply. Lucas: That's the trade-off. The government and central bank chose disinflation over short-term growth. They've accepted a slowdown in the domestic economy to rebuild credibility. And so far, it's working better than many analysts expected. Luna: If walking through the economy with us has made something click about how countries like Turkey navigate these trade-offs, that's exactly the kind of understanding we want to keep delivering. These episodes stay ad-free because listeners support the show at buy me a coffee dot com slash fexingo. It's a simple way to keep us going. Lucas: Yeah, and we really appreciate that — it keeps the conversation focused on the numbers and the ideas, no interruption. So, back to Turkey's structural challenges: the big question is whether the credibility is sustainable after the next election cycle. Luna: That is the elephant in the room. Erdogan has historically favored low rates. If he changes his mind again or appoints a dovish governor, all this progress could unwind fast. Lucas: Markets are pricing that risk, but they're also pricing the fact that the current policy framework has delivered results. The lira is stable, inflation is falling, foreign reserves are rebuilding. The central bank's net reserves turned positive earlier this year after being deeply negative. Luna: So what's the benchmark for success? Is it getting inflation down to single digits? Lucas: The official target is 5 percent by 2027. That's ambitious. Most economists think inflation will settle around 15 percent in the next couple of years. But if they can keep it below 20 percent and maintain stability, that's a huge improvement from the 85 percent nightmare. Luna: And foreign investors are noticing. I've seen data from the Istanbul stock exchange — foreign portfolio inflows have picked up significantly in 2025 and 2026. Lucas: Right. A lot of that is in Turkish government bonds, which offer real yields above 10 percent. For global bond funds looking for carry, Turkey is one of the few markets where you get that kind of return without currency collapse risk — at least for now. Luna: But there is still the current account deficit. Turkey imports a lot of energy and raw materials. When global oil prices spike, the lira can come under pressure again. Lucas: That's a structural vulnerability. However, the current account deficit has narrowed to around 2 percent of GDP, from 5 percent a few years ago. Tourism and export growth have helped. And the energy transition — Turkey has been investing in renewables and nuclear, which could reduce import dependence over time. Luna: Do you think Turkey's model could be replicated in other emerging markets that face similar inflation and currency crises? Lucas: To some extent, yes. The core lesson is that institutional credibility matters more than short-term growth. But Turkey also benefited from a relatively diversified economy, a strong export sector, and a tourism industry that bounced back quickly after COVID. Not every EM has those buffers. Luna: And the political will to endure a recession-like environment. Many governments would cave. Lucas: Exactly. So Turkey is a case study in how painful but necessary the orthodox path can be. The next test will be whether they stick with it as the 2028 elections approach. If they do, Turkey could emerge as a genuinely investable EM again. Luna: And if they don't, we'll be back to the punchline. Lucas: Yeah. But for now, it's one of the more interesting turnaround stories in emerging markets. Worth watching closely.