The Turkish lira on January 11 for the first time hit the milestone of 30 to the dollar.

Ending the day near its new record low of 30.015, the Turkish lira (TRY) continued the slide that saw it lose more than a third of its value last year and 80% of its worth in the last five years. Losses in the new year so far amount to 1.6%.

Analysts say the prospects for the lira have brightened this year following the economic U-turn performed by Turkish President Recep Tayyip Erdogan since his re-election in May last year and appointment of a new economic team that has brought the country’s low-rates-despite-rampant-inflation economic unorthodoxy to a halt.

But according to Timothy Ash, senior sovereign strategist at BlueBay Asset Management, the currency is "still [a] key battle for [Finance Minister Mehmet] Simsek et al, and [a] test of the success of [economic] stabilisation".

"[It's] still hard to anchor the lira with inflation at 65%," he was reported as saying by Reuters.

Turkish central bank governor and former Wall Street banker Hafize Gaye Erkan was on January 11 due to deliver presentations to foreign investors on monetary policy, inflation and Turkish assets in New York at the headquarters of JPMorgan Chase & Co. The day included a note from JPMorgan analysts in which they said they expected the TRY to fall to 36 to the USD by the end of 2024, further than their previous forecast of 34.

Since Erdogan appointed Erkan and Simsek in June last year, the central bank has hiked Turkey’s benchmark rate by 3,400 bp to 42.5%.

Erkan and Simsek are seeking to persuade foreign investors to return to buying Turkey’s domestic assets. With many nursing burnt fingers, they largely abandoned the country as Erdogan pushed a growth-at-all-costs policy and applied tight state management to the foreign exchange, debt and credit markets.

A difficulty for foreign investors is that restrictions in the offshore lira-swaps market, originally brought in to foil short sellers, obstruct the path for investors looking to protect exposure to Turkey.

“The challenge right now is that the cost of hedging the currency risk is very high, around 40%,” Grant Webster, a portfolio manager and co-head of emerging markets at Ninety One in London, was reported as saying by Bloomberg. “Investors need to take a long-term view, which is not easy in Turkey given the recent history of policy missteps.”

Turkey does, however, by now have the highest local-currency yields among major developing nations, according to the Bloomberg Emerging Markets Local Currency Government Index.

Erkan has said that now may be the most optimal time to enter the Turkish debt market, pointing to plans for a more “moderate” policy environment to come. She has also contended that investors should focus not on current inflation, but the central bank’s forecast that it will slow to 36% by the end of the year.

“For foreigners to return they need to see patience, because this is going to take a long time to unwind. It’s not going to be painless,” Ninety One’s Webster was also quoted as saying.

Turkey’s official inflation looks set to peak in May. It should then fall below the policy rate in the next few months thanks to the base effect. So the beginning of lira appreciation should arrive in July at the latest.

bne IntelliNews’ Turkey Outlook 2024 advises: “Turkish lira papers are expected to prove the bet of the year in 2024. Following the local elections that will be held on March 31, Turkey’s policy rate will reach its peak. The finance industry will then be welcomed in for the rate-cutting feast. Double returns from the rising prices of lira papers and lira appreciation will be written.

“When the USD/TRY stops heading north, the carry trade will also be on the table. With the non-capital controls on the lira market easing, the forex trade option will also return.

“Eurobonds sold by Turkey’s government and big corporates always offer good returns. They currently stand in the 7-9% range, for long-termers.

“The prices are at their peak at the moment as Turkey’s five-year credit default swaps (CDS) fell below the 300-level during the new year rally on global markets.

“The course of the CDS does not indicate there is much space left in the downward direction. For trade purposes, a jump in the CDS during the next market stress (possibly up to the end of February on global markets or prior to the local elections in Turkey) could be followed up.”