Geopolitical Risk and Asset Allocation in Turkey: Navigating Political Turbulence and Currency Volatility

In 2025, Turkey's political landscape has become a textbook case of how geopolitical risk can destabilize capital flows and currency markets. The escalation of opposition probes, epitomized by the March detention of Istanbul Mayor Ekrem Imamoglu, has triggered a cascade of economic consequences. Foreign investors, once cautiously optimistic about Turkey's growth potential, have recalibrated their strategies in response to the deepening uncertainty. According to a report by France 24, the lira depreciated to a record low of 42.00 per dollar in March 2025, eroding months of gains and signaling a loss of confidence in the government's economic stewardship Crackdown on opposition tips Turkey into financial turbulence | France 24^[2]. The Central Bank of Turkey (CBRT) intervened aggressively, deploying $28 billion in foreign currency reserves between March 19 and 24 to stabilize the currency, yet the lira continued to weaken by over 9% against the dollar by mid-September Inflation and political strife test Turkey’s stability | AGBI^[1].

The political instability has also driven a sharp exodus of foreign capital. Data from the AGBI reveals that investors withdrew $7 billion from the Turkish stock market between March 14 and 21 alone, with additional outflows from the bond market compounding the crisis Türkiye Foreign Direct Investment (FDI) Strategy (2024–2028)^[5]. By May 2025, net portfolio outflows had reached $12.5 billion, as foreign investors sought safer havens amid fears of further crackdowns and unpredictable policy shifts BofA notes lasting impact on Turkish lira volatility sensitivity | Investing.com^[3]. This flight of capital underscores a broader trend: political risk in Turkey is no longer a peripheral concern but a central determinant of asset allocation decisions.

Currency volatility has become a persistent feature of Turkey's financial markets. A September 2025 analysis by Bank of America noted that the lira's implied volatility had become unusually sensitive to changes in foreign exchange (FX)-implied yields, a sign of heightened investor anxiety BofA notes lasting impact on Turkish lira volatility sensitivity | Investing.com^[3]. Meanwhile, the CBRT's decision to cut its benchmark one-week repo rate by 250 basis points in September—bringing it to 40.5%—further complicated the outlook. While the move aimed to ease inflationary pressures (which stood at 32.95% in August), it also signaled a lack of consensus within the central bank, deepening market skepticism Crackdown on opposition tips Turkey into financial turbulence | France 24^[2].

For foreign investors, the challenge lies in balancing exposure to Turkey's potentially lucrative markets with the risks of political and economic turbulence. One strategy gaining traction is the use of currency hedging tools. Forward contracts and options have become essential for mitigating lira depreciation risks, particularly for firms with long-term commitments in sectors like manufacturing, which relies heavily on imported raw materials Inflation and political strife test Turkey’s stability | AGBI^[4]. Additionally, investors are increasingly favoring dollarized or state-guaranteed FX-protected deposits, which offer a buffer against currency swings Crackdown on opposition tips Turkey into financial turbulence | France 24^[2].

Sector-specific opportunities remain, but they require careful navigation. The Turkish government's 2024–2028 Foreign Direct Investment (FDI) Strategy emphasizes infrastructure, energy, and healthcare as priority areas, with funding increases of up to 62.5% in agriculture and 46.5% in healthcare Türkiye Foreign Direct Investment (FDI) Strategy (2024–2028)^[5]. However, these sectors are not immune to political risk. For instance, the energy sector's push for renewable projects faces delays due to regulatory opacity and frequent legal changes Inflation and political strife test Turkey’s stability | AGBI^[4]. Similarly, the transportation sector's high-speed rail projects, while promising, require navigating complex permitting processes and potential shifts in policy priorities.

The path forward for Turkey hinges on its ability to stabilize its political environment. Analysts warn that without democratic normalization and institutional reforms, the country risks becoming a pariah in global capital markets. As noted in a JPMorgan report, geopolitical instability now ranks as Turkey's top risk, surpassing even inflation and external debt concerns Inflation and political strife test Turkey’s stability | AGBI^[1]. For investors, the lesson is clear: asset allocation in Turkey must prioritize liquidity, hedging, and diversification. While the country's strategic location and demographic potential remain attractive, the current climate demands a cautious, risk-averse approach.