In March, Turkey experienced market volatility due to the detention of mayor Ekrem Imamoglu, weakening the lira. The central bank raised the effective interest rate but relied on outdated mechanisms like the ‘rate corridor’ and ad hoc FX interventions.

The re-introduction of soft capital controls, such as forced FX sales by exporters, marked a retreat from clear, rule-based policies. Although funding costs are now higher, inconsistent monetary policies have lessened the benefits of higher rates, with FX interventions proving unsustainable.

Balance Of Payments Concerns

The balance of payments data from March revealed a shift from capital inflow to net outflow. Both portfolio and bank sector experienced $3.6bn outflow each for the month, with seasonal factors not entirely explaining these outflows, raising concerns for April and May.

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Following the political turbulence in March, largely sparked by the detention of a notable opposition figure, the abrupt change in market tone should not go unnoticed. Foreign exchange pressures intensified, with the Turkish lira pulling back in response to investor discomfort and perceived instability. Rather than leaning into more predictable and credible channels, policymakers relied on tools which have, over time, lost their effectiveness—such as the old ‘rate corridor’ model and short-term currency interventions. We’ve seen this script before, and it doesn’t inspire long-term confidence.

Further complicating the policy backdrop, authorities reinstated measures amounting to soft capital controls. Exporters have been effectively compelled to convert foreign exchange earnings, indicating direct intervention in currency markets. While this move might temporarily assist in stabilising reserves, it introduces uncertainty into trade and investment decisions, particularly when it’s not anchored to a consistent framework.

Challenges In The Financial Landscape

Interest rates have indeed climbed, making local funding noticeably more expensive. On paper, that should buttress the lira and temper inflation expectations. However, when rate increases are not paired with clear communication and policy consistency, their effectiveness begins to erode. In this case, unpredictable interventions and control mechanisms have blunted what would otherwise be the stabilising effect of higher yields.

More pressing still is the sudden deterioration in balance of payments dynamics. March data confirmed a pivot—from net inflows to net outflows—which marks a sharp switch in investor sentiment. Strikingly, both the capital markets and the banking sector each saw $3.6bn in net outflows. These aren’t trivial numbers. And while seasonality can sometimes add noise to monthly figures, this shift suggests deeper concerns taking root among institutional actors, particularly given the parallel trends across different segments.

Looking ahead into the coming weeks, this trajectory places added strain on reserve adequacy and demands a recalibration of hedging strategies. Tighter controls and erratic interventions generally push risk premia higher, not lower. If April and May data continue to confirm capital flight, then volatility in local assets, especially those dependent on short-term flows, may increase further. It’s worth re-examining assumptions around short-dated instruments and FX forwards, as pricing could overshoot or become more reactive on thinner flows.

All of this collectively points to a market environment that is less accommodating to leveraged exposures, particularly in carry trades or synthetic lira positions. Given the challenges around policy transparency, those trading derivative instruments tied to Turkish assets will want to reduce reliance on macroeconomic stability assumptions and instead stay agile around headline risk and liquidity shifts.

We continue to see macro-event risk dominating price discovery, rather than fundamentals. With this in mind, hedges that appear conservative today could prove prudent if volatility spikes around domestic news or further unorthodox decisions. It’s a time for strategies that can respond quickly, particularly in week-ahead positioning.

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