Global Finance: Tell us about Uzbekistan’s transformation over the past eight years and what else you are looking to accomplish.

Laziz Kudratov: The changes that started in 2016 continue. We have seen GDP rise by 6% in 2023 and 6.4% in the first half of 2024. Along with a more business-friendly environment, key reforms, such as reducing VAT from 20% to 12% and creating special economic zones, we have strengthened our position as an attractive destination for foreign investors.

We have unified the exchange rate and liberalized the forex market, making it easier for international partners to do business here, including through public-private partnerships and outsourcing. We have also become a hub for IT with the creation of the Tashkent IT Park; and our first unicorn, Uzum, an e-commerce platform, is now valued at over $1 billion.

On the green energy front, we are striving to become a leader in Central Asia. We have recently secured a $13.1 billion investment from ACWA Power for 9.6 GW wind and solar power projects, and we partnered with Masdar for 2 GW green projects with investments of $1.7 billion, which is a key part of our broader effort to increase the share of renewables in our energy mix. In total, 35 agreements for green energy projects with a total capacity of 18.6 GW have been signed over the past four years—an essential step toward creating a more sustainable energy future.

Moving forward, we plan further legal reforms aimed at solidifying investor rights, enhancing transparency and improving business efficiency. By integrating more closely with the global economy, particularly through WTO membership, Uzbekistan aims to become a dynamic economic force regionally and globally.

GF: Uzbekistan is Central Asia’s most diversified economy. Has this been an advantage in driving growth?

Kudratov: Diversification sits at the heart of all our modernization efforts, allowing us to remain resilient in the face of an increasingly volatile global economy. By ensuring growth across multiple sectors with the support of international investors, we are positioning for long-term, sustainable development. This balance between established industries and emerging sectors is driving our progress.

We have built upon our traditional industries, such as textiles, mining, and agriculture. In the textile sector, we created Specialized Textile Industrial Zones, designed to attract investments by offering favorable operating conditions. Since the reforms began in 2017, the sector has welcomed investments totaling $9.8 billion. Today, as in the past, Uzbekistan is Central Asia’s textile hub.

We also have a highly developed mining industry. The Navoi Mining and Metallurgical Company (NMMC) ranks among the top four gold producers globally, while the Almalyk Mining and Metallurgical Complex (AMMC) is a leading global copper producer. The agricultural sector has been transformed, with several programs implemented to boost trade and provide farmers with access to essential technology, supplies and funding.

Manufacturing has seen a significant boost, contributing over $55 billion to the economy in 2023. Today, automotive firms such as BYD, KIA, and GM are producing cars in Uzbekistan, making us the leading car producer in Central Asia. In the electronics sector, in partnership with Samsung, an enterprise was established for production of electrical appliances, with investments of half a billion dollars. The chemical industry, built on abundant mineral resources, is benefiting from modernization efforts and government initiatives. From 2017 to 2023, we attracted $9.7 billion in FDI, with companies such as AIR Products and Casale building facilities here.

Meanwhile, Uzbekistan’s building materials industry is booming in response to growing demand. Over $8.7 billion has been invested by international companies in cement plants, glass factories, and rolling mills between 2017 and 2023.

We have also made a conscious effort to develop new sectors such as pharmaceuticals, IT, and renewable energy. IT sector expanded rapidly, with the IT Park exporting $344 million in IT products and services in 2023. These sectors are quickly becoming key pillars of our economy.

Total FDI in electricity over the last six years has amounted to an impressive $10 billion, and we are aiming to increase generating capacity coming from renewable sources to 20 GW by 2030, ensuring that green energy is about 40% of the total.

GF: The recent Central Asia summit saw the countries of the region commit to regional integration. How realistic is this given Uzbekistan’s historic close relations with Russia—and have we started to see evidence of it yet? 

Kudratov: Uzbekistan has prioritized strengthening ties with its neighbors and fostering regional collaboration, with particular focus on diplomatic initiatives like Consultative Meetings of Central Asian Leaders, border demarcation, visa liberalization, initiatives stimulating regional trade and certainly economic cooperation.

Integration priorities include regional connectivity, water resource management, energy and security cooperation, as well as cultural and educational exchange.

The recent Summit marked an important step toward deeper regional integration. Uzbekistan is actively focusing on improving trade routes. One key example is the China-Kyrgyzstan-Uzbekistan railway, which will be crucial in facilitating trade within the region and beyond.

GF: In terms of attracting FDI and other investments, what are Uzbekistan’s main advantages? 

Kudratov: Uzbekistan offers three key attributes that make it a highly attractive destination for FDI.

Third is our reforms. Our more business-friendly environment includes customs duty exemptions on over 7,000 raw materials, a three-year tax exemption on dividends for foreign investors, and a lowered profit tax rate of 12%. We have also strengthened legal protections for foreign investors, ensuring their businesses are both secure and welcomed in Uzbekistan. Our inclusion in the OECD’s Regulatory Restrictiveness Index highlights our growing competitiveness.

Between 2017 and 2023, Uzbekistan utilized $60.9 billion in FDI and non-guaranteed loans, which funded large-scale projects across both sectoral and regional programs. We are continually striving to create a business ecosystem that is dynamic, inclusive, and future-ready.

GF: The plan is to attract some $250 billion in investment by 2030. How realistic is this?

Kudratov: Our goal is ambitious, and it is not something we can achieve alone. Uzbekistan is moving forward, and we are making it one of the best places to do business. But we need partners who share our ambition. The opportunities are here, the workforce is ready, and the incentives are in place. This is a chance to be part of something big, something transformative. Together, we can build an economy that benefits everyone.

Ilham Aliyev, the 62-year-old president of Azerbaijan, should be feeling pretty content. Being chosen to head the COP29 Summit in Baku, attended by over 190 countries, is a big honor.

It is also controversial; Azerbaijan is the second petrostate in a row to host COP following Dubai in the United Arab Emirates last year, and the summit president will be Aliyev’s natural resources minister, Mukhtar Babayev, who has spent 26 years of his career at the State Oil Company of the Republic of Azerbaijan (SOCAR). The event nevertheless gives this country of 10.3 million—the world’s first major energy producer, whose iconic Flame Towers in Baku symbolize the “Land of Fire’s” huge natural gas wealth—an impressive 12 days in the international spotlight.

COP29 follows a spell of good economic news for Azerbaijan. GDP growth has been picking up from 2023’s sluggish 1.1% pace thanks to a boost in demand for energy exports among consuming countries keen to diversify away from Russia and a stronger than expected non-oil economy. Growth increased by 4.3% year-on-year in the first half, leading forecasters to raise their full-year projections. 

“We are currently expecting 3.2% for 2024, but with the likelihood of an upside,” says Erich Arispe, senior director and the head of Emerging Europe Sovereigns at Fitch Ratings. “Growth is taking place against a background of falling average inflation—from 2022’s 13.9% and 2023’s 9% to around 3.5% this year—and a strengthening external balance sheet.”

Azerbaijan’s net sovereign asset position, at 71% of GDP in 2024, puts it among the highest of its BBB-rated and A-rated peers, as does government debt, at just 21.5% of GDP in 2024. Fitch upgraded the country’s sovereign rating to investment grade in July, to BBB- from BB+, with a stable outlook, and upgraded several Azeri commercial and banking entities, including SOCAR and ABB, the International Bank of Azerbaijan.

Aliyev is hosting COP29 at a time when most world leaders see his country as “relevant and useful,” says Tinatin Japaridze, South Caucasus analyst with the Eurasia Group: an alternative energy source to Russia, a possible bringer of stability in the notoriously unstable Caucasus, and an attractive destination for foreign direct investment not only in oil and gas but in the non-oil economy, given Aliyev’s promise to diversify.

Azerbaijan has, in fact, long been committed to boosting its non-oil economy and diversifying away from fossil fuels, which account for almost 48% of GDP and 92.5% of export earnings. The government aims to lure foreign direct investment (FDI) into such sectors as tourism, information and communication technology, logistics and transport, and agribusiness.

But progress has been slow. Poor corporate governance, corruption, high levels of state capture, and lack of transparency are all problems, according to Transparency International, which ranks Azerbaijan 154 out of 180 countries, alongside Tajikistan and Turkmenistan, in its Corruption Perceptions Index (CPI).

“All these sectors have potential,” says Fitch’s Arispe, “but because of domestic business environment factors have seen little in the way of FDI, while domestic investment has been partly held back due to constraints on access to financing. If Azerbaijan is to boost long-term growth away from the 2%-to-3% a year long-term trend, development of the non-oil economy is essential.”

Investment zones may be part of the answer; the Alat Free Zone south of Baku offers a range of incentives, including independent dispute resolution procedures in accordance with international standards.

An area receiving special attention—despite Azerbaijan’s image as an oil-dependent economy—is renewables and sustainable projects. The government is committed to reducing greenhouse gas emissions by 40% by 2050 and increasing renewable power capacity to 30% from today’s 7%—mainly accounted for by three hydro projects—by 2030. Boosting green energy is seen as not only good for the environment but, with much of it to be used domestically, a way to free up gas that can then be exported to Europe via various pipelines.

The multinational development banks are encouraging the shift. The European Bank for Reconstruction and Development has allocated €3.7 billion ($4 billion) to various projects, including, in April, Azerbaijan’s first renewables auction, for a 100-megawatt solar power development in Garadakh, and has been working closely with the Ministry for Energy to develop a new legal and regulatory framework for renewables, including a new Renewables Energy Law.

A series of major private-sector initiatives are underway as well, including Masdar, a huge solar energy project with UAE participation, and ACWA Power, a wind power project signed with Saudi Arabia that, when completed, will generate one billion kilowatt-hours, enough to power 300,000 homes.

Azerbaijan will be keen to use its role as COP29 chair to initiate more renewable and sustainable projects and speed existing ones, even as it maintains its lucrative role as a fossil-fuel exporter.

“Azerbaijan is in the active phase of green transition,” Aliyev said in a TV interview earlier this year, “but at the same time, no one can ignore the fact that without fossil fuel, the world cannot develop, at least in the foreseeable future.” Gas exports will remain a key source of foreign earnings, underscored by the European Commission’s agreement to double energy imports from Azerbaijan by 2027 in order to further reduce its dependence on Russian gas.

Renewables investments are expected to contribute to the $10 billion that Aliyev plans to invest in Nagorno-Karabakh, the mountainous region that Azerbaijan wrested control from Armenia last year, alongside major infrastructure investments.

“The government’s fiscal consolidation strategy has been adjusted to enable the government to meet its reconstruction and development commitments in Karabakh, but it will be also keen to attract foreign investment,” says Arispe.

Turkish and Russian companies will probably be among the more active investors, but Azerbaijan will be eager to lure Western companies, their presence further conferring international recognition of the region as a part of Azerbaijan. But some observers warn that improving the investment environment and tackling corruption and poor governance will be critical, both in Karabakh and more widely in the non-oil economy.

“Sustainable partnerships in green energy will be key going forward,” says Japaridze. “Although it may be increasing gas exports now, Azerbaijan must be realistic about how long this can be maintained, especially with the economy probably underperforming over the longer term.”

Surveys suggest production is poised to decline in another five to eight years, she notes. “Like every other country, it really has no real alternative to looking seriously towards a greener, more sustainable future.”

At last year’s COP28 conference in Dubai, the participating governments—197 countries plus the European Union—committed to a tripling of renewables targets and a doubling of energy efficiency. When they check on their progress at COP29, officially known as the Conference of Parties, which opens on November 11 in Baku, the capital of Azerbaijan, their agenda will be, if anything, more ambitious. It will range from protecting biodiversity to capacity-building for carbon markets to climate education and youth action to inclusiveness for Indigenous people and other marginalized groups.

Added to that should be grid and storage targets ensuring that countries have the capacity to store renewable-generated energy, says Dave Jones, Global Insights program director at Ember, a UK-based energy think tank. COP29 has already called for a sixfold increase in global energy storage by 2030, to 1,500 gigawatts of capacity. “To reach this goal,” Michael Bloomberg, the UN’s special envoy on climate ambition and solutions, has said, “it’s critical that we increase collaboration among private, public, and nonprofit leaders.”

Key to all these goals is climate finance, which is expected to be a central focus of this year’s gathering.

“This year is known as the finance COP,” says Natalia Alayza, manager in the Sustainable Finance Center of the World Resources Institute (WRI). This year’s participants are expected to adopt a new target for the collective investment they pledge to make each year toward climate action. That target was set at $100 billion in 2009, a goal they only met in 2022.

“Adopting the new collective quantified goal (NCQG) which will replace the $100 billion goal will be the key priority,” says Alazya, “not only because it will bring trust into the international climate finance negotiations but also because it will be crucial to supporting developing countries’ climate ambition commitments.” At a minimum, she urges, the participants should pair the new target with a clear delineation of what it will fund—adaptation, mitigation, loss and damage, for example—who the providers and recipients will be, and the timeframe for delivery.

Bridging the often-considerable gap between ambition and accomplishment has been one of the biggest hurdles to meaningful implementation of climate change goals. The Climate Bonds Initiative’s Partnership Program is just one of many attempts to boost the use of climate bonds, particularly in the areas of GSS (green, social, and sustainability) markets. This year’s Climate Finance Summit, held in Kuala Lumpur in August, and the Climate Investment Summit held in London in June, underscored the importance of governments and the private sector working closely together, particularly as climate mitigation becomes a priority.

With dramatic storms and floods in many places becoming more common, some observers argue that countries will have to be ready for a once-in-100-years storm pretty much every year—which raises the urgency of securing financing now.

“One of the most important needs in Central Asia is sustainable infrastructure,” says Ludger Schuknecht, vice president of the Asian Infrastructure Investment Bank (AIIB), “everything from dealing with effluent water from the Aral Sea to the enhanced connectivity of transport infrastructure between the five countries of the region.” The AIIB held its annual general meeting this year in Samarkand, Uzbekistan, focusing closely on meeting climate goals.

“Private capital mobilization is one of the main priorities for doing so,” says Schuknecht, adding that the AIIB has already exceeded its 2023 climate finance goal of 55% of total investment, typically $10 billion a year, with 60% of total invested funds going toward green infrastructure, connectivity and regional cooperation, private capital mobilization, and technology-enabled infrastructure.

“There is now almost no project that we sign or initiate that doesn’t have a climate change dimension,” he notes.

Mobilizing private capital is the only realistic way to bridge the “trillions of dollars wide” climate finance gap, argues Dimitri Gvindadze, director of Climate Strategy, Regional Delivery at the European Bank for Reconstruction and Development (EBRD). Last year, the bank’s annual green finance investment totalled close to €7 billion ($7.3 billion), nearly half its total outlay.

“Through our investment, we mobilized a total of $27 billion in private sector finance toward climate-related projects,” he notes, “meaning that for every $1 billion of our own investment, we mobilized over $3 billion in the private sector.” 

Aside from boosting climate finance generally, Gvindadze would like to see COP29 prioritize Article 6—carbon trading—as well as areas that align with the EBRD’s activities. The bank is working on a new strategic and capital framework, to be published next year, that will focus on three priorities: green, inclusion, and governance.

But he sees a green dimension in just about every sector, including finance, transport, agribusiness, municipal, industrial and energy. Scaling up private investment in renewables often requires additional investment in public infrastructure such as electrical grids, he notes, which generally means major involvement by the state. Going forward, a faster-paced green transition will depend on politics, the business climate, macroeconomic stability, land rights, various regulations and licenses, budgetary and financial constraints, and concerns about energy security. These must be tackled as and when they arise.

“In terms of country ambition, our view is that where there’s a will, there’s a window,” Gvindadze argues. “Yes, there is a correlation between projects and geopolitical risk aversion, but our view is that the green transition is about enhancing the long-term competitiveness of your economy,” adding that COP29’s aims should be seen in these terms.

Another key priority, says the WRI’s Alayza, should be to find ways to boost public-private cooperation.

One option, Alayza says, could be to “explore or increase the use of financial instruments that mitigate the risks of private investments, such as guarantees, which still have space to grow when looking at, for example, the multilateral development banks’ climate finance portfolio.”

While many critics complain that the COP process is moving too slowly, Ember’s Jones is broadly positive. He points to the recent decision by the UK—the world’s first industrial nation, whose prosperity was built on coal—to phase out its last coal-fired power station by next year. Since the Paris Climate Change Agreement of 2015, he notes, 27 of the 38 OECD countries have committed to becoming coal-free by 2030, and since then, coal generation has dropped by 52%.

“We’ve seen action where you’d maybe least expect it,” Jones says, “with Saudi Arabia committing to having half of its electricity generated by renewables by 2030 while two-thirds each of the wind turbines and solar energy plants now installed worldwide are in China.”

With COP29 only weeks away, the world is not sitting still, however. The US presidential election will have already been held by then; with one of the two candidates highly skeptical of the realities of climate change, the outcome could significantly undermine US involvement and commitment to COP goals. On the other hand, the meeting of the G20 Rio de Janeiro Summit on November 18-19 will overlap with COP29. That, and the fact that Brazil is scheduled to host COP30 next year and is committed to serious action to mitigate climate, could bring more intensity to the proceedings.

“COPs are inherently complex, because they represent a platform for multiple stakeholders,” says EBRD’s Gvindadadze. “But they are useful for drumming up a sense of urgency.”

After a year of unprecedented climactic volatility—ranging from heat waves and drought to high-intensity storms, hur- ricanes, and major flooding—the urgency is already there.

In a referendum on October 20, Moldovans formally enshrined the pursuit of EU membership in their country’s constitution by the narrowest of margins: 50.4% against 49.6%, hardly the huge majority opinion polls had forecast. On the same day, pro-Western President Maia Sandu came first in a presidential election she had called early, but again by much less than expected. With only 42% of votes cast, she faces a run-off against pro-Russian candidate Alexandr Stoianoglo, who received 26%, on November 3.

All this despite the EU’s having offered the divided but strategic country of three million people a €1.8 billion multiyear, pre-accession aid package earlier this year.

Before the vote, Sandu, a former World Bank official, had warned of Russian interference in the form of direct bribes to voters and crude anti-EU propaganda on pro-Russian media; estimates of the amount spent run up to $100 million.

“We are facing an unprecedented attack on freedom and democracy,” said Sandu, charging that pro-Russian criminal groups led by Ilan Shor, an exiled Israeli-born pro-Russian oligarch, and others had been actively promoting “unprecedented fraud.”

Chronic, widespread poverty in Europe’s poorest country may also have contributed to the narrow vote. Efforts to break its dependence on Russian energy, much of it provided via the separatist pro-Russian region of Transnistria, has forced Moldova to buy from Romania, at much higher prices.

Georgia, meanwhile, was due to hold parliamentary elections on October 26, amid concerns whether the ruling Georgian Dream party, bankrolled by oligarch Bidzina Ivanishvilli, Georgia’s richest man, an avowedly pro-EU figure who nevertheless tilts towards Moscow, would accept defeat. The EU registered its unhappiness earlier this year by formally suspending Georgia’s candidacy for membership.  Policymakers in Brussels, Washington DC, and Moscow will be watching events in the two ex-Soviet republics closely.

With Belarus’ economy increasingly integrated into that of Russia, it makes perfect sense for the National Bank of the Republic of Belarus (NBRB) to proceed with plans to introduce a digital Belarusian ruble linked to the Russian currency. Although plans at the time of writing are sketchy, it is understood transactions will be classified as noncash settlements. However, Chairman Pavel Kallaur has said that other steps will be taken to improve the economy’s overall efficiency and maintain the high levels of bank lending.

“To form a stable resource base for banks necessary to expand lending, measures will be taken to develop the long-term deposit market, as well as to increase the share of ruble savings,” he said in a speech before Parliament in late June.

This lending is helping to boost GDP growth, which was 3.9% in 2023. The government expects it to be around 3.4% this year, although the International Monetary Fund (IMF) is forecasting a more modest 2.4%.

This year, Kallaur marks 10 years as governor of the NBRB, during which he has worked closely with the country’s president, Alexander Lukashenko. Price controls have remained on certain goods monitored by the NBRB, while keeping a close eye on inflation is given high priority. The inflation target for 2021-2025 is 5%, and the IMF expects the rate to reach 6.3% this year, going up a little to 6.5% for 2025.

On January 3, Jasmina Selimović was appointed as the new Governor of the Central Bank of Bosnia and Herzegovina (CBBH) for a six-year term. She replaced Senad Softić, who had extended by three years his official six-year term started in 2015. Early signs are that the new governor aims to continue Softić’s reliable stewardship of monetary policy. In her inaugural speech, Selimović stressed the need for stability and a continued striving for transparency, reiterated in her first meetings with officials of the European Union and the IMF.

Monetary policy in Bosnia and Herzegovina has been stable for a long time, with a currency board in place for more than a quarter of a century, and no change is expected. Selimović emphasizes the need for the currency, the convertible mark, to remain stable and convertible—prerequisites for financial stability and economic prosperity. Macroeconomic fundamentals have improved recently, with real GDP growth expected by the IMF to accelerate in 2024-2026 from 2.5% to 3%, a bit higher than forecast by CBBH six months ago. Inflation is projected to ease from an average of 3% in 2024 to 2.7% next year. There are plans—but no clear timetable—for Bosnia and Herzegovina to join the Single Euro Payments Area, dramatically reducing the cost of sending money to and from the EU.

The June 2024 European Commission convergence report confirmed further progress toward eurozone membership, the expected culmination of decades of alignment with EU standards and policies. The main sticking point now appears to be inflation. Harmonized consumer price inflation in May (5.1%) exceeded the ECB’s tolerance threshold (3.3%). Over the coming months, the expected narrowing of the gap may prompt the caretaker government (resulting from inconclusive parliamentary elections) to request another impromptu official assessment soon. However, clearing the inflation hurdle may prove difficult and elusive.

Like the EU, Governor Dimitar Radev of the Bulgarian National Bank (BNB) is concerned about longer-term price pressures emanating from an expansive fiscal policy. He has stressed the need for “a pro-European government with a sufficiently broad support and action horizon,” with both issues clearly linked. In that respect, progress has gone into reverse. As the June 2024 parliamentary elections produced an inconclusive outcome, a return to the polls is scheduled for October. It will be the seventh parliamentary election since 2021. The political malaise and institutional stalemate may also explain the delay in finding a successor for Radev, whose original six-year term ended in July 2021. In 2023, he was reappointed for another six years. Radev’s longevity may yet prove beneficial in a fluid political situation.

The Czech National Bank (CNB) has a reputation as one of the most conservative in the region, and its cautious actions over the past year have been consistent with this. Having presided over a rise in interest rates over 2022-2023 to counter inflationary pressures, it has since overseen a fall in rates to 4.25% by September 2024.

Given that its main priority is price stability—with a target range of 1%-3% for inflation—the CNB under Governor Aleš Michl can be happy with the outcome. By June 2024, inflation was 2%, down from May’s 2.6% and below market expectations. Since then, it has stabilized at 2.2% over July and August. Michl expects it to remain stable this year and into next, led by falling food and drink prices, among other things. This should enable a further gradual easing of interest rates by year-end.

Michl sees price stability as the cornerstone of a broader economic strategy incorporating a pragmatic fiscal policy, reflecting the Czech Republic’s close integration with the eurozone and Germany (despite remaining outside the euro). He seems well aware of the challenges facing the country. These include relatively anemic growth—just 0.7% at best expected this year, rising to 2% in 2025—but also accelerating real wages and labor shortages, which could be an inflationary trigger. Monetary policy will need to be responsive to this reality.

The central bank of Denmark (Nationalbanken), hit its 2% inflation target without more-significant economic deceleration in 2024. Following the lead of the European Central Bank (ECB) on interest rates to prevent currency devaluation, the country started its monetary easing cycle in June, cutting interest rates by 0.25% then and again in September.

The country’s most recent numbers signal a stable overall economic outlook, with inflation at 1.4% in August and annual GDP growth projected at 2.1%. Unemployment, however, rose slightly from a steady 2.5% to 2.6% as of July. One of the main secrets behind the country’s above-average performance is a sustained increase in employment, resulting in upward revisions of growth forecasts and a more substantial budget surplus.

The country’s economy was significantly boosted by its thriving pharma industry, with Bagsværd-based global leader Novo Nordisk becoming Europe’s largest company by market cap in early 2024.

In a June announcement, Nationalbanken says that the current “economic progress raises expectations for the Danish economy in 2024.”

Christine Lagarde’s term at the ECB’s helm has significantly shifted for the better in 2024.

After a difficult 2023, when geopolitical pressures gathered with tight monetary conditions to create a near-stagflationary environment in the eurozone, the central bank has managed to inch much closer to its 2% target with successive consumer price index (CPI) readings under 3% since February of this year, down to 2.4% in August.

Against the improving backdrop, Lagarde seemed to have anticipated the US Federal Reserve’s September rate cut by starting its easing cycle in early June, lowering the eurozone’s interest rate by 25 bps to 4.25% and then in September to 3.65%.

Lagarde had left rates unchanged in July and August due to the potential devaluation of the euro currency against the US dollar.

Nonetheless, the new monetary cycle has already impacted the ECB’s GDP expectation for the euro area, which is now projected by the IMF to grow 0.8% in 2024 and 1.5% in 2025, significantly better than 2023’s 0.4%.

On the inflation front, the ECB has already gone below its 2.5% projection for 2024 and now projects it at 2.2% in 2025.

Acting head of the National Bank of Georgia (NBG) since June 2023, amid controversy over what was regarded as a highly political appointment, Natia Turnava has yet to be formally appointed governor. But that has been the least of her problems, as she and the NBG have been dragged into Georgia’s increasingly bitter political divisions.

Questions were raised over her judgment in September 2023, when she failed to enforce international sanctions on Georgia’s former prosecutor general Otar Partskhaladze—who has close connections to Russian President Vladimir Putin—claiming that the freezing of a Georgian individual’s assets could be enforced domestically only by a Georgian court. Her controversial stand led to three top-level resignations from the NBG and a rebuke from Georgian President Salome Zurabishvili, who called on her to resign.

Turnava has also been obliged to spend foreign currency to prop up the lari last May, despite fierce opposition from all other political parties, the president, and the EU, which subsequently suspended membership negotiations with Georgia. This was at the height of antigovernment demonstrations against the country’s so-called foreign agents law. According to Fitch Ratings, international reserves dropped from a peak of $5.4 billion in August 2023 to $4.6 billion in June of this year, that decline beginning soon after the start of Turnava’s tenure.

She has done nothing to dispel concerns about her conduct last September, and her closeness to the governing Georgian Dream party has undermined confidence.

In June, Fitch Ratings warned that “perceived risks to the independence of the NBG could erode policy credibility, potentially weakening the capacity of Georgia’s small, open and dollarized economy to respond to external shocks.”

As regards monetary policy, the NBG has followed a broadly tight strategy, with rates cut to 8% in May, against inflation of 2% at that time, although high levels of dollarization impact policy transmission. Inflation peaked at 2.2% in June, then subsided to 1% by August.

The reputation of the central bank of Hungary—the Magyar National Bank (MNB)—took a battering last year, and that of its governor as well. Hungary had high inflation—25.7% at its peak. The full year of 2023 saw a GDP contraction of 0.9%. Criticism of the MNB’s complex interventions was also rife, with observers saying they complicated monetary policy and often simply did not work.

The governor’s term in office finishes in early 2025, and 2024 has been quieter than 2023, with inflation and interest rates returning to normal ranges. Average inflation this year is expected by the IMF to be 3.7% against 17.1% last year; while interest rates have fallen sharply, by half, from 13% in October 2023 to 6.50% in September 2024. Growth is projected at 2.2% in 2024, going up to 3.3% next year. Governor György Matolcsy seems unlikely to make many more interest cuts this year.

“The pace of cuts is set to slow over the remainder of 2024, with the central bank emphasizing the importance of positive real rates and stability of the financial markets,” wrote Fitch in its June 2024 report on Hungary.

However, Matolcsy—a former close ally of Prime Minister Viktor Orbán who fell out with him in early 2024 over Orbán’s plans to increase government oversight of the MNB, which the governor said would compromise its independence—may yet surprise markets. With Matolcsy and the government blaming each other for Hungary’s poor economic performance, and with discussions over the oversight laws due to resume in the autumn, further interest rate cuts could happen, as Matolcsy will likely want to leave the MNB in 2025 on a high note.

While most central banks around Europe have already begun to inch closer to their inflation targets, the Central Bank of Iceland continues to lag.

In its latest inflation estimate, in August, the Nordic island’s CPI inflation marked a hefty 6%, still nowhere close to the central bank’s 2.5% on-average target.

After a 4.1% year-on-year jump in GDP for 2023, the country posted a meager 0.6% quarter-on-quarter growth in February and a desolating -4% in May.

In its August statement, the central bank expects the battle against inflation to continue: “The current monetary stance is sufficient to bring inflation back to target, but persistent inflation and strong domestic demand call for caution.”

The central bank of Norway, Norges Bank, has continued to march toward its 2% inflation goal, albeit facing growing signs of a broader economic deceleration.

In its most recent CPI report, the Nordic country posted prices that continued to moderate, at 2.6% in August.

Despite that, the country hasn’t started to cut rates, maintaining a fairly strict 4.5% policy rate, the high point that was reached in December, 1.9% in real terms.

After a positive 2023 for the country, the tight monetary stance has started to affect the broader economy. According to the latest readings, GDP in Q2 jumped to 4.2% from Q1’s 0.9%, while unemployment had dropped to 3.8% in July, but grew again to 4% in August.

Matthew Schneider, an economist at Moody’s Analytics, believes we’re still far from seeing a pivot from the central bank. “After pushing back our expectations for the timing of these cuts to September, hawkish language from the committee today suggests that rate cuts may come even later than anticipated,” Schneider explains.

National Bank of Poland (NBP) Governor Adam Glapiński, 74, who started his second term in 2022, has presided over an inflationary environment that decreased and increased again over 2024. The CPI, which the IMF estimates at 11.4% for 2023, is projected to fall to 5% for this year, remaining at that level in 2025, above the target of 1.5%-3.5%. Growth has returned to the economy, too, with GDP expected by the IMF to rise 3.1% this year against 0.2% in 2023.

In June, Glapiński appeared to take a firm line against inflation—sustained by high energy prices, the imminent removal of a price gap, and continuing wage pressures—saying there is no chance of a cut in the current 5.75% rate this year or even next. However, as Fitch Ratings points out, he faces a difficult balancing act.

The past year has been an uncomfortable one for Glapiński and the NBP. Prime Minister Donald Tusk, who swept into government for the second time in the October 2023 elections, has accused Glapiński of politicized policymaking because of his controversial decision to drop interest rates by 0.75% to 6% in September, ahead of the October vote, despite an unpropitious environment with high inflation.

Glapiński—who was appointed by the previous Law and Justice Party (PiS) government and is a personal friend of its chairman, Jarosław Kaczyński—denies the accusations; but, at the time of writing, he could still face government prosecution despite the constitutional court ruling in January that the governor of the National Bank of Poland cannot be put in front of a tribunal.

You don’t get to remain a highly respected central bank governor for well over 30 years without being a survivor, and Mugur Isărescu, 75, has proved that over the past year. He has been governor of the National Bank of Romania since 1990—except for an 11-month hiatus as prime minister from 1999 to 2000—and has been cautious. The world’s longest-serving central bank governor is expected to be given another five-year term in a vote scheduled this fall. His recent record has been solid.

According to ING, most forecasts suggest this year will see an increase in GDP of between 2.5-3%, with total GDP expected to double over the next decade. Isărescu’s concern, however, is that although food and fuel prices have fallen since 2023, inflation remains sticky with the price of services, rising real wages, strong demand for imports, and continuing expansionary fiscal policy all possible triggers for this persisting into next year at around 4.5%-5%.

However, after a slight drop in inflation to 5.1% in May, July saw a reduction of 25 basis points to 6.75% and another 25 bps cut in August, to 6.5%, hinting that any subsequent reductions later in the year would be equally small. Isărescu maintains that it is best to err on the side of caution rather than having to reverse any interest rate cuts later.

Despite hitting 1.9% in its August inflation read, thus approximating the 2% target inflation rate, the latest batch of economic data paints an increasingly worrisome picture for the historically solid Swedish economy.

Unemployment was down to 7.9% in August, from a high of 9.4% in June; and first-quarter GDP rebounded to 0.7% from a -0.1% drop in Q4 2023. Pressure on the Riksbank to deepen its rate cut cycle, which started in May this year with a cut to 3.75% from 4.00%, is growing by the day.

Against the worrisome backdrop, Governor Erik Thedéen brought the policy rate further down, to 3.5% in August and 3.25% in September, saying that he saw the Riksbank cutting two or three more times this year.

“I see it as more likely that we will be able to make three—rather than two—full rate cuts so that the policy rate amounts to 2.75 per cent after the December meeting,” said Thedéen at the time of the August cut.

The first major central bank to cut rates in 2024, the Swiss National Bank (SNB), has kept setting the trend for the rest of the developed world by achieving a perfect balance between economic growth and inflation.

Despite lowering the SNB’s benchmark rate to 1.25% at its June meeting—its second 25 bps rate cut of the cycle—Governor Thomas Jordan still delivered an impressive streak of inflation readings under 1.5% this year, sustainably below the bank’s 2% target. The SNB cut another 25 bps in September.

And if that weren’t enough, the milestones were accompanied by an impressively low unemployment rate, 2.4% in August, which displayed the overall resilience of the country’s economy.

The main worry now lies on the GDP front, where the country had recorded successive quarter-on-quarter readings below 0.5% since the third quarter of 2022, rising above that to only 0.7% in this year’s second quarter. But the SNB should have space for further rate cuts this year, and the bank’s next governor, Vice Chairman Martin Schlegel who will start Oct. 1, said he would stick with the bank’s price stability goals.

 Fatih Karahan, who took over as governor of the Central Bank of the Republic of Turkey (CBRT) on February 3, has shown even greater determination than his short-lived predecessor—Turkey’s first female governor, Hafize Gaye Erkan, who left for several reasons, including personal—to bring inflation to heel. The complex web of unorthodox financial regulations imposed over the past few years has been dismantled. Karahan has been working closely with respected Finance Minister Mehmet Simsek to present a united policy front and reassure markets. In six years, Turkey’s sixth central bank governor has been at pains to stress that mainstream monetary policy will now be the order of the day.

That said, Turkey’s biggest problem—inflation—shows little sign of being defeated, though it has come down to 49.38% as of Septemeber, from its high of 75.45% in May. Meanwhile, interest rates have been at 50% since March, after nine consectutive increases. These stratospheric rates have left the relatively low rates of the unorthodox, pre-Erkan era behind, when the key rate stood at 8.5% prior to June 2023. These rates have attracted large inflows of foreign fare unds, with the Turkish lira becoming the most-traded emerging market currency in mid-2024. Around $12.5 billion has also been attracted by Turkish government bonds.

However, the CBRT insists that inflation will continue to fall substantively throughout 2024 and into 2025. For this reason, fiscal policy is also being overhauled, with Simsek announcing a comprehensive new corporate tax regime in July 2024 to complement further monetary tightening.

At the CBRT’s May rate-setting meeting, the bank announced a series of liquidity tightening measures—including foreign exchange–protected deposit accounts and new higher reserve requirements for the lira—aimed at supporting the bank’s tight money policy, which it said would continue until there were clear evidence of a substantive fall in inflation and inflationary expectations. For 2024, the IMF forecasts inflation to drop from 38.4% in 2025 to 22.4% in 2026. Monetary tightening is expected to impact growth, which is now likely to be a “more sustainable” 3.1% this year against the 4.5% recorded over 2023 and the 4% initially expected by the government.

In a surprising turnaround from 2022’s highly unfavorable backdrop, the Bank of England managed to reach its 2% inflation target and sustain it through May and June, then remain close to that through August, indicating that the worst may be over for the country’s once-escalating consumer prices.

Although consumer prices ticked slightly upward to 2.2% in July, the context remains highly supportive of a deeper rate-cut cycle, particularly given that economic growth has remained largely subdued, albeit posting a positive 0.9% quarter-on-quarter increase in July, up 1.2% year-on-year. Governor Andrew Bailey made the first rate cut of the interest rate cycle in August, bringing the base rate from 5.25% to 5% and confirmed this in September. However, he refused to shed light on the pace of the rate-cut cycle as a whole, saying that the “job is not done on the inflation front.” He focused on the stickier core of inflation as the argument to remain data-dependent going forward.

Global Finance: Next year marks the end of your second term as governor of the MNB. Looking back to 2013, what have been the biggest changes in Hungary’s economy, and what have been your main achievements?

György Matolcsy: After the global financial crisis, central banks realized that monetary institutions and policy needed to be renewed. This turnaround took place successfully in Hungary after 2013. The crisis pointed out the vulnerability of the financial system; therefore, the merger of the central bank and financial supervision into one institution helped strengthen financial stability. In parallel with achieving and maintaining price stability, the MNB strengthened the economy with targeted instruments.  

In the second half of the 2010s—largely due to the central bank’s measures—Hungary’s economy was characterized by balance and high growth; average GDP growth during 2014-2019 was 4.1%. The MNB has recognized that these results can be preserved through an improvement in competitiveness.

The [post-Covid-19] global inflationary shock affected Hungary greatly, but the MNB reacted in a decisive and timely manner. It has taken appropriate measures to reduce inflation from a high level, but it is not over yet—the return of inflation must be avoided. 

The main message of the past 12 years is that the formula of economic balance and growth takes you forward. The MNB contributed the most to growth by restoring and maintaining stability and, when it was possible, it strengthened it by implementing strong economic stimulus measures.

GF: Does Hungary still have plans to join the euro and, if so, what might be the timetable?

Matolcsy: The MNB is committed to the successful and safe introduction of the euro, but the right timing is key. As a catching-up economy, we must reach the appropriate preparedness for euro adoption.

In recent years, the MNB has recognized that for successful euro introduction, we cannot be satisfied with just fulfilling the Maastricht criteria. A stricter set of criteria is needed to determine the optimal timing, which takes into account real criteria—for example, competitiveness, relative GDP per capita position, the harmonization of business and financial cycles—in addition to the nominal conditions. By reaching the appropriate level of economic development, we can be among the winners of the euro project.

GF: Earlier this year the government said it wished to increase oversight over the MNB, something which you were very much opposed to, as it would undermine its independence. What is the status of these plans now?

Matolcsy: Central bank independence is absolutely key, particularly in such an uncertain environment. It provides assurance that the central bank is able to concentrate on its long-term statutory mandate to achieve and maintain price stability. Economic history shows us that independent central banks are more successful in bringing down inflation, and ultimately in creating the conditions for sustainable economic growth. The government has openly received the bank’s reasoning, and it is fundamental that any decisions [it makes] must strengthen central bank independence.

GF: Going forward, what do you think will be the main challenges facing the MNB and, more broadly, the Hungarian economy?

Matolcsy: In the 2020s, the world is facing complex challenges with the effects of colliding megatrends—geopolitical changes, the green transition, deteriorating demographic prospects and digitalization. These must surely also affect the monetary policy framework. For central banks, achieving and ensuring price stability remains the primary objective, in addition to ensuring financial stability. At the same time, megatrends will influence the expected path of inflation. Among these megatrends, central banks must also be open to the green transition and digitalization and give an adequate response to them. Central banks can facilitate a faster and smoother green transition and thereby ensure a lower inflation path. The MNB has undertaken a pioneering role in supporting the green transition of the economy with several instruments. Digitalization can open a new era in the history of money, such as through central bank digital currency [CBDC], something being actively researched right now by central banks around the world.

Global Finance: You are Bosnia and Herzegovina’s first female central bank governor. How important is this, and how have you defined your priorities?

Jasmina Selimović: It makes me proud but also very aware of the huge responsibilities that this honorable duty carries. In a modern society, women holding leadership positions is not unusual. But in central banking, according to the IMF, 29 women are central bank governors in just 16% of the world’s 185 central banks. There is still a long way to go.

Regarding priorities, we will stay focused mainly on preserving the currency board and the stability of the institution. The work method, defined by the Law on the Central Bank of Bosnia and Herzegovina, clearly defines the parameters of monetary policy, as well as the currency board arrangement. The CB must keep its independence, integrity and professionalism. The currency is stable and convertible, those being the preconditions for financial stability and economic prosperity. As the owner of the RTGS [Real Time Gross Settlement] and GIRO [General Interbank Recurring Order] clearing systems, we will continue to ensure the stability of payment systems.

Looking ahead, we will invest particular attention in connecting with the central banks of the region and of Europe. We will continue to fulfill commitments toward European integration, which will become increasingly complex. We already participate in the preparation of analytical publications, such as the ECB’s financial stability assessment for EU candidate countries and the European Commission’s annual report.

GF: Having a currency board links your currency to the euro. What precisely does this mean for day-to-day operations? 

Selimović: Our currency is pegged to the euro at 1.95583, a rate derived from the previous exchange rate of one German deutsche mark to one Bosnian convertible mark [BAM]. Our main objective is stability, reflected in the currency board mechanism, which is strict and conservative. This means that every single BAM is at least 100% covered by foreign exchange reserves, so convertibility is unquestionable. In operations, this means that our main units [in Sarajevo, Banja Luka, Mostar and branches in Brčko and Pale] carry out daily transactions at the above-mentioned fixed rate. These transactions affect the level of the foreign exchange reserves, which is consequently reflected in the portfolio managed on daily basis by the CB.

It is very important that we are able at any moment to fulfill any request by our commercial banks to buy currency or sell it to them, as convertibility is granted by the law. Our main objective is maintaining the stability of the domestic currency, which requires safe and prudent management of the foreign exchange reserves.

GF: One of the biggest challenges for BH has been poor transparency and corruption, listed 110th out of 180 countries in Transparency International’s 2022 report. Where is it now, and what can the CB do to improve things?

Selimović: Based on the Corruption Perceptions Index from the 2023 TI Report, BH is in 108th place, so it has not recorded much progress. We must make significant steps in resolving corruption and strengthening the judiciary.

At the CB, we apply EU corruption prevention standards. We monitor business compliance to prevent conflicts of interest, corrupt actions and other risks that may result in financial losses or undermine our reputation. Our work impacts the entire financial system of the country, so public trust is extremely important to us, especially in times of crisis.

Related to this, we have introduced a Code of Ethics to prevent conflicts of interest and to enable online reports of any corruption or irregularities in the work of the CB. The system is independent and protected, and the CB’s determination to strengthen integrity and ethics enabled it to win the prestigious Transparency category in the 2023 Central Banking Awards.

GF: How serious a problem is slowing economic growth, 2% in 2023, and what can do done to boost it?

Selimović: The slowdown of economic activity in the EU, as well as global geopolitical tensions, led to a decrease in our exports. Domestic industrial production and exports declined significantly in 2023, while in the first five months of 2024, these declined by an additional 5.7% and 8.5%, respectively. Furthermore, competitiveness in past two years was undermined by a high growth in labor costs and low productivity. Structural reforms are necessary to boost domestic economic growth and harmonize it with the EU.          

In the years between the world wars, Czechoslovakia was the economic powerhouse of Central Europe, synonymous with such names as Skoda Autos, Tatra Truck, Jawa Motorcycles, Bata Shoes, and Bohemia Crystal, with the region’s highest living standard.

Since the collapse of the Eastern Bloc in 1989, the Czech Republic, or Czechia—one of the two successor states after Czechoslovakia split in 1992—has rebuilt this reputation for excellence, with the auto industry (now almost 25% of exports), machinery and equipment, and electrical sustaining a modern manufacturing economy. A dynamic services industry led by tourism, business services, and communications has helped create a diversified economy, stabilized by EU membership and close integration into the European and particularly the German supply chain.

Foreign direct investment in Czechia is strong as well, with over 2,100 projects currently underway and stock topping $200 billion: almost double the total of 10 years ago. Despite being outside the eurozone, Czechs are some of Europe’s wealthiest citizens; per capita GDP is just over $30,000—ahead of Spain at $29,600—and expected to rise 24% to $37,000 by 2029, according to Statista. 

“The expansion would also enhance our production of intelligent power semiconductors, essential to helping ensure the EU [can] significantly reduce carbon emissions and its environmental impact,” says Hassane El-Khoury, president and CEO of onsemi.

While the republic’s infrastructure is advanced by regional standards, work has started on its first high-speed railway, which will allow trains to travel at speeds of up to 320km an hour and eventually connect Prague to Brno and on to Dresden; the project is expected to be completed by 2030.

In the meantime, the Czech economy looks to continue its slow recovery from last year’s decline in GDP. Fitch’s Krzywicka expects export growth to remain subdued due to the sluggish German economy while private consumption ticks up. The benchmark interest rate, currently at 4.5%, is likely to be cut further over the rest of 2024.

“The main goal of the Czech National Bank is price stability,” Krzywicka says.

In the wider economy, however, change is clearly afoot. The present pro-business government is leaving investors and startups in the priority sectors—including AI, green energy, and other new technologies—in no doubt of its support, says CzechInvest’s Partl: “The message is clear: Go out and do your best. Even if you fail, we will be there to catch you and help you start up again.”

For the better part of a decade, Turkey has hardly presented itself as a happy hunting ground for investors. Since the attempted coup of 2016, when it lost its sovereign investment grade rating, erratic policymaking—especially on the monetary side—and a succession of short-lived appointments to the central bank have combined to keep foreign money on the sidelines.

The Turkish lira has lost some 80% of its value against the US dollar over the past five years, hitting an historic low of more than 30 to the dollar in January. Inflation remains high, at around 65%, with the current account a worrying 4% to 5% of GDP.

Yet those who wrote Turkey off after last May’s presidential election, which saw Recep Tayyip Erdogan return for a third five-year term as president, have so far been proven wrong.

In February, an inaugural $500 million bond offering by the Turkey Wealth Fund (TWF) attracted orders totalling some $7 billion, suggesting the country will be active on bond markets this year; some $10 billion is expected to be issued this year, similar to the 2023 total. The TWF holds shares in some of Turkey’s leading companies, including Turkish Airlines, Borsa Istanbul and local energy giant Botas, leading observers to anticipate further offerings, particularly as the yield on the five-year bond dropped to 8.3%, below the targeted level above 9%. Turkish five-year dollar bonds are currently trading with a yield around 7.6%, which is competitive for an emerging market.

Tourism last year reached record arrivals of almost 50 million visitors, up 10% from 2022, and income from tourism rose 17% to $54 billion. In January, the auto industry notched record export earnings of almost $2.8 billion. Both were good news for the current account deficit.

Fatih Karahan, the new governor of the Central Bank of the Republic of Turkey, has shown greater determination than his predecessor to bring inflation to heel. Interest rates now stand at 45%, versus 8.5% nine months ago, and a complex web of unorthodox financial regulations is slowly being dismantled. Turkey watchers were also reassured that the change of governor—the seventh since 2016—was not the result of presidential dismissal; Karahan’s predecessor resigned for a range of reasons, some personal.

Analysts say the credible team of Karahan and Finance Minister Mehmet Simsek, appointed after last year’s elections, has helped transform Turkey’s prospects. Simsek—previously deputy prime minister, and an analyst with Merrill Lynch prior to that—is seen as guiding policymaking, and his presence reassures markets.

“Turkey had no choice but to return to rationality,” says Erich Arispe, Turkey analyst with Fitch Ratings, says of the new team. “This time last year, our sovereign rating was B with a negative outlook; now it’s B with a stable one.” He warns, however, that some clouds are still on the horizon.

“The big question is how durable the policy adjustment is, and how much political space there is for monetary and fiscal tightening,” Arispe argues, even though policymakers are insisting they will do whatever it takes to reduce inflation. The hit to growth—which is expected to fall this year to 2.5% versus 4.5% in 2023, when the economy was buoyed by preelection spending—will be considerable if inflation is to be significantly reduced.

Early signs are that the tightening is working, but some analysts think rebalancing will take longer than many expect.

“Fourth-quarter GDP data showed that private spending has accelerated despite an increasingly restrictive policy stance,” ING economist Muhammet Mercan and emerging markets strategist James Wilson told clients in February, “while leading indicators point to further GDP acceleration in Q1 this year. This implies there is still a long way to go.”

The good news is that much of that continued growth reflects strong investment, with machinery equipment and the construction sector both looking healthy. The planned construction of four new airports, a new superfast train that aims to connecting Istanbul to Ankara in just 80 minutes by 2035, and investments worth 210 billion Turkish lira ($6.5 billion) in the southern city of Mersin following the construction of Turkey’s first nuclear power plant there, all suggest that Erdogan has not lost his passion for big infrastructure projects.

Most analysts remain upbeat about the private-sector impact of the return to orthodoxy and higher interest rates—and a depreciating lira, which has dropped 40% since last year’s elections.

The European Bank for Reconstruction and Development “has been active here for 15 years, and we feel [Turkey] is vibrant and very resilient,” says Rafik Selim, the EBRD’s lead regional economist in Istanbul. Last year, the bank invested a record €2.5 billion ($2.7 billion) in Turkey, including sums sent in response to the February earthquake and substantial commitments to green projects, bringing total investments to €19.5 billion in 440 projects, making Turkey the EBRD’s biggest country of operation.

“The private sector and small to midsize enterprises will be key drivers of growth,” Selim says, “as Turkey takes advantage of its big domestic market and of major nearshoring opportunities, made more attractive by the close long-term relationship with the EU.”

Turkey has made strides in investment in human capital, Selim notes, particularly in the less-developed eastern part of the country—and in digital transformation and renewables. Significant investments in solar and wind energy will bolster long-term sustainability and improving energy security, key for a country not blessed with abundant fossil fuel sources.

In March, the government unveiled a 57-point, two-year investment action plan “to facilitate and simplify the legislation, administrative and judicial processes related to the investment environment,” giving priority to projects promoting digital and green transformation.

The big challenge now will be for Turkey to step up its efforts to attract foreign direct investment. In a recent speech, Burak Daglioglu, head of the Presidential Investment Board, noted that the country had attracted $262 billion in foreign investment since 2003, helping it transition from a low-middle income country with per capita income around $3,000 a year to a high-middle income economy with an average of $13,000 per capita and foreign companies accounting for 8.4% of private-sector employment.

Difficult economic conditions have encouraged a brain drain in recent years, however, along with large-scale capital outflows, which last year amounted to some $20 billion. Although much of this could be characterized as hot money, the pullback suggests that Turkey could be doing more to attract long-term investment from abroad.

“Although FDI is positive in net terms—last year it was $10.6 billion, or around 1% of GDP—it is not as high as it was or as Turkey really needs,” warns the EBRD’s Selim, who points out that in the boom years of 2005 to 2008, enthusiasm for Turkey’s then reform path pushed FDI to around 3% of GDP. The reasons are many, including the Covid pandemic, wars in Ukraine and Gaza, and a global trade downturn. “Turkey is not disconnected from what’s happening in the wider region,” Selim cautions.

On the plus side, it seems investor confidence is returning. The Borsa Istanbul All-Share index is up more than 20% in dollar terms this year, outperforming other indexes—although with inflation still running around 65%, real interest rates remain negative.

The positive response to last month’s Turkish bond issuance is another plus; foreign capital inflows are critical. Should confidence in the lira fall too far, however, observers say authorities need to be prepared for all contingencies, including a rise in the current account deficit and unmanageable pressure on the Lira Deposit scheme, which offers individuals protection against exchange rate fluctuations and is currently worth some $80 billion. “Even in time of stress, unlike other similarly rated countries, Turkey has been able to maintain market access,” Fitch’s Arispe notes.

Ahead of local elections at the end of March, Erdogan had promised voters that the focus on growth would resume once Turkey surmounts “the difficulties” it must tackle in 2024. Analysts greeted that reassurance of no deviation from the current orthodox monetary policy as good news.

“Investors need stability and certainty, not least that the return to orthodox economic policies will be sustained,” EBRD’s Rafik says.

BOG chairman Mel Carvill said the acquisition would let the bank pursue opportunities in one of Europe’s fastest-growing emerging economies.

Fitch Ratings suggests that the takeover—subject to regulatory approval in both countries—is ambitious, given that Ameriabank is equivalent to 31% of BOG assets, which could give rise to contagion risks. Nonetheless, it notes that Ameriabank will remain a stand-alone entity. And the Georgian bank can certainly afford it, given that net profits in 2023 were $496 million.

“BOG’s capital position is supported by the bank’s robust profitability, which benefits from wide interest margins and a long record of only moderate loan-impairment charges. We expect net income to equal 25% to 30% of average equity in the next two years,” says Dmitry Vasilyev, a senior director at Fitch Ratings, suggesting the bank’s BB/Stable rating is unlikely to be impacted.

BOG’s bid for Ameriabank is testimony to the dynamism of Armenia’s economy, despite losing the war with Azerbaijan over Nagorno-Karabakh in 2023.

Armenia’s GDP grew by 12.6% in 2022 and 7.4% in 2023, with some 6% growth expected this year—for the same reasons behind the massive growth in Armenian bank deposits and earnings. The Caucasus nation has seen considerable human and financial capital from Russians and Russian businesses that do not want to be locked into Russian banks by international sanctions.

According to Fitch Ratings, “Armenian bank revenue spiked dramatically in 2022, with the pre-tax average return on equity increasing to 28%. The ratio eased to 17% in 2023, which is still far above the 2018–2021 average of 9%.” The group revised the outlook of three banks from Stable to Positive on February 22. With such figures, expect other foreign banks to follow BOG into Armenia, where further bank consolidation is expected.