Türkiye surprise tax hike to boost budget, risk Lira appetite

(July 9): Türkiye raised withholding taxes on lira-denominated deposits and mutual funds, tightening its grip on household savings as it seeks fresh revenue to ease the budget deficit.

The tax on deposits with maturities of up to six months was increased to 17.5% from 15%, according to a presidential decree published on Tuesday. For deposits of up to one year, it rose to 15% from 12%. Mutual fund earnings, excluding equity-heavy and long-term real estate or venture capital funds, will be taxed at 17.5%, up from 15%.

The move comes after Türkiye’s Treasury and Finance Minister Mehmet Simsek acknowledged some weakness in the country’s budget revenues in a speech in London on Tuesday. Türkiye’s budget deficit target of 3.1% for 2025, relative to gross domestic product, “may not be reached because revenue performance isn’t as strong as expected,” Simsek said, according to state-run Anadolu Agency.

While the hikes may bolster public finances as the government faces a widening budget deficit, they also complicate the central bank’s campaign to de-dollarise the economy and encourage lira savings by offering positive real returns. Most analysts expect the bank to cut rates in July.

“This withholding tax increase was a surprise,” said Batuhan Ozsahin, chief investment officer at Ata Portfoy. “Since it comes to both deposits and mutual funds on the lira side, there is not much alternative for the investor in terms of switching from one product to another.”

Mehmet Gerz, CEO of Osmanli Portfoy, said the move could push investors toward equities. The benchmark Borsa Istanbul 100 Index was up 0.8% as of 11:07 a.m. in Istanbul.

The budget deficit reached TRY650 billion (RM69 billion) in the first five months of 2025, up 38% from the same period last year. Spending rose 44%, driven in part by an increase in interest payments. The government is targeting a full-year deficit of TRY1.93 trillion, with its medium-term program projecting a shortfall of 3.1% of GDP.

Meanwhile, the amount of money parked at investment funds stood at TRY6.25 trillion as of July 8, according to data from the Central Securities Depository.

Following the arrest of Istanbul Mayor Ekrem Imamoglu in March, which led to a steep sell-off in Turkish markets, the central bank responded with interest rate hikes and additional measures. While these steps made money market funds attractive, the central bank also drained excess liquidity multiple times to push deposit rates higher.

Although the dollar has lost value against most emerging market currencies due to global trade wars, it’s gained against the lira due to Türkiye’s political turmoil. The lira has depreciated nearly 12% this year, the most in the world after the Argentine peso.