Turkey’s central bank has shifted its monetary policy by ending its foreign exchange protection scheme, which had guaranteed depositors against currency depreciation.
The Central Bank of the Republic of Turkey (CBRT) announced this transition in its December 25 monetary policy roadmap amid strengthening economic indicators.
Under the previous lira-denominated FX-protected deposits (KKM) scheme, depositors, including those under the citizenship by investment program (CIP), received protection against lira depreciation through a unique mechanism.
If the lira’s decline exceeded the interest rate earned during the deposit period, the central bank would compensate depositors for the difference.
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For CIP investors maintaining $500,000 in Turkish lira deposits, this mechanism provided crucial protection against currency volatility, effectively guaranteeing their investment’s dollar value.
The decision comes as Turkish lira deposits now constitute 59% of total deposits. Protected deposits under the scheme have diminished to just 6% of total deposits, as KKM balances fell to $34.2 billion by December 20, 2024.
Existing KKM account holders, including current CIP investors, retain their protection until maturity.
This grandfathering provision creates a two-tier market – current investors maintain their safeguards while new applicants face direct exposure to currency movements.
For prospective CIP investors considering the deposit route, this change fundamentally alters the risk calculation of the bank deposit route.
Throughout 2024, the bank gradually reduced minimum interest rates for protected deposits from 85% of the policy rate to 50%, demonstrating its growing confidence.
However, the gap between current inflation at 47% and the bank’s 5% target suggests potential volatility ahead.
The bank’s strengthened position may provide some reassurance for potential investors.
International reserves have reached $164 billion, while net reserves excluding swaps increased by $87 billion to $50 billion.
External liabilities decreased by $11 billion during 2024, enhancing the bank’s capacity to manage market volatility.
Under the floating exchange rate regime, the bank explicitly states it will not intervene to defend any specific exchange rate level.
For CIP investors, this creates both opportunities and risks – while the high policy rate of 50% offers substantial yield potential, currency movements could affect the investment’s real value.
Financial institutions maintain varying outlooks. Morgan Stanley projects the TRY/USD rate to reach 43 lira to the dollar by year-end, while S&P Global anticipates 42 TRY/USD.
Long-term forecasts from AI-based platforms suggest steeper depreciation; WalletInvestor is projecting 62 TRY/USD by 2028.
The bank’s November upgrade of Turkey’s credit rating to BB- reflects its growing confidence in the country’s economic management, though challenges remain.
The CBRT expects continued demand for lira assets as disinflation becomes more evident through 2025.
A “free passport” route no more
Ahmet Şener, CEO of Smart Citizenship, believes the end of the KKM scheme to be a lost opportunity for CIP investors. “It was literally a free passport since it guaranteed the investment in USD terms plus throwing in 6% gift interest,” he explains. “Yet, despite zero risk, people didn’t use it, mainly because they didn’t understand it.”
He says people would “rather buy overpriced real estate that was so inflated on the appraisal report that their citizenships are stuck in limbo,” pointing to the KKM scheme’s underutilization.
The government “understands what is going on” in terms of inflated property prices, and applications with “widely misvalued real estate can stay stuck in processing for months, if not longer, as the government scrutinizes them,” Şener explains.
Thus, he believes the deposit route was one of the “simplest and fastest routes” but that the government’s termination of the KKM scheme has “effectively ended it for risk-averse investors.”
He says the deposit route went under the radar because “the issue was mainly with RCBI promoters – they don’t talk about the routes that don’t involve commissions.”
The CIP’s other investment options remain unchanged, including $400,000 in real estate or various other options at $500,000, including capital investment, REITs, government bonds, and investment funds.
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Ahmad Abbas is the Editor of IMI Daily, IMI’s flagship news publication.
