Net capital inflows to Türkiye expected to rise in 2025: Report

Net inflows of non-resident capital to Türkiye are expected to increase in 2025, provided that orthodox macroeconomic policies are sustained, the Institute of International Finance (IIF) said in a report.

"Authorities have communicated their commitment to maintain a tight policy stance until significant strides are made in curbing inflation and steering inflation expectations on a downward trajectory," it said Wednesday in the report titled Capital Flows to Emerging Economies.

It said tighter macroeconomic policies helped Türkiye to narrow its current account deficit to $10.9 billion in the first quarter of this year, down from $24.6 billion in the same period of last year, adding those policies attract sizable net inflows of non-resident capital.

The near-term prospects for net capital flows to Türkiye hinge on whether resident and non-resident investors will find the wider spreads offered by Turkish assets attractive enough, especially considering that continued tight, or even tighter policies will further reduce the country's external and internal vulnerabilities, such as its narrowing current account deficit and easing inflation, it added.

The Washington-based association for the global financial services industry said it expects that wider interest rate spreads will help Türkiye to attract sufficiently large capital flows to finance smaller current account deficits of 2.6% of GDP in 2024, and 2.2% in 2025, down from 4.2% in 2023.

"We project that such an external financing scenario will align with a slowdown in real GDP growth from 4.5% in 2023 to 3.5% in 2024 and further down to 2.5% in 2025," said the report.

The IIF also forecast net foreign borrowing in the form of loans from non-resident creditors should decline, reflecting slowing real GDP growth and weaker credit demand.

The association expects net inflows of non-resident capital to moderate slightly from $66 billion in 2023 to $62 billion in 2024, before picking up to $68 billion in 2025.

"The primary downside risk is a deterioration in investor sentiment towards Turkish assets, which could be triggered by premature easing of policies or failure to achieve the projected reduction in inflation and the current account deficit," the report noted.