Smart money runs first

Even by the turbulent standards of emerging markets, the past week was a master class in how quickly capital can vanish in the face of political dysfunction.

The immediate, violent reaction of the Turkish lira to the arrest of Istanbul Mayor Ekrem Imamoglu — President Erdogan’s most prominent rival — offered a stark reminder: Mr Market reacts faster, more brutally, and more truthfully than any diplomatic protest ever could.

What was intended as a political show of strength unraveled into a financial rout. The lira tumbled nearly 12pc in a single session before stabilising, and local banking shares cratered.

Offshore investors, already jittery, didn’t wait for statements or spin. They pulled out en masse, triggering a near-instant collapse in confidence. To stop the bleeding,

Turkish authorities were forced to pull all the usual rabbits out of the macro-emergency bag — raising the upper band of the interest rate corridor to 46pc, banning short selling on the Istanbul stock exchange, and selling a reported $14 billion in foreign exchange to hold up the lira.

What spooked the market was not just the arrest itself — autocrats jailing political opponents is hardly news — but the timing, the tone, and the broader macro backdrop. Wall Street had just begun tiptoeing back into Turkey, enticed by high interest rates and promises of orthodoxy from Finance Minister Mehmet Simsek. But those bets rested on a wafer-thin assumption: that Erdogan, having handed economic management to a technocratic team, would, for once, let policy — not politics — set the agenda.

When the crisis came, though, that illusion lasted all of 30 minutes.

The reaction wasn’t confined to Turkey. Macro risk in emerging markets is, unmistakably, all too real. In Indonesia, President Prabowo Subianto’s open disdain for central bank independence and fiscal restraint triggered the resignation of Finance Minister Sri Indrani — and a 7pc nosedive in Jakarta stocks. Colombia, too, is showing signs of strain — and it’s not alone.

Layered atop all this is the external shockwave emanating from Washington. Tariffs are already core US policy, and emerging economies that depend on open trade channels don’t know how to handle the kind of economic nationalism that hasn’t been seen since the 1930s. The “most beautiful word in the dictionary”, as Trump often calls tariffs, has returned as a blunt instrument that’s aimed at friend and foe alike?

None of this bodes well for the carry trade, particularly the Turkish variety. Over the past year, Turkey became a magnet for yield-hungry investors looking to ride high interest rates with leveraged exposure to the lira.

Estimates suggest upwards of $24bn poured into these trades, with the implicit assumption that currency stability could be managed, and that politics — while noisy — would remain predictable.

That assumption has now been shattered.

The Imamoglu arrest and ensuing crackdown on markets sparked a rapid unwind. As the lira unraveled, offshore funding rates briefly surged to near 100pc, forcing traders into disorderly exits as margin calls kicked in. In the span of days, the central bank’s net foreign exchange position shrank by over $12.5 billion — a direct consequence of defending a currency now seen as politically compromised. In short, the carry trade turned into a capital trap.

This isn’t the first time Turkey has played this game. It has a long and painful history of attracting hot money with high yields, only to see it flee at the first whiff of instability. The pattern is familiar. Capital flows in, reserves build up, policymakers get complacent, political drama erupts, and the exodus begins. What makes this time different is the context — not just domestic but global.

The Federal Reserve, boxed in by inflation and geopolitics, is no longer riding to the rescue with rate cuts. Liquidity is scarce, risk appetite is thinning, and business uncertainty is back at pandemic-era levels.

If anything, Turkey has now become a case study in what not to do. In an era when the rules of the global economy are up for renegotiation, and the shocks are as likely to come from the White House as from Tehran or Taipei, countries that depend on market trust have to treat it as sacred. Instead, Ankara has shown how easily that trust can be burned.

The broader lesson here goes beyond one country. What we’re seeing is a macro-political critique of emerging market fragility under stress. These economies aren’t just exposed to their own institutions — they’re now deeply entangled in the whims of strongmen, both domestic and foreign.

Political volatility, trade protectionism, central bank interference, and strategic overreach have become the rule, not the exception. Investors are watching, and they’re moving fast.

And in this unforgiving climate, when the music stops — it’s the smartest money that runs first.

Copyright Business Recorder, 2025