Page 7 - TURKRptMay19

2.0 Politics
2.1 ISTANBUL BLOG: Turkey in limbo – Markets only hear
the tick tock of the Erdogan clock
Turkey, you might say, has more or less been in limbo since election night on March 31. The economy, the financial markets, domestic and foreign politics—in short, the country as a whole—are all waiting to find out what road the previously invincible President Recep Tayyip Erdogan will take following poll results showing that he and his AKP party have lost Ankara and Istanbul to the opposition.
Might the election board risk derision by coming up with less than rock solid claims of voting irregularities to overturn the ruling party’s unprecedented defeat in Istanbul? If it does so there are those who will declare that democracy is dead in Turkey, but until the Erdogan administration decides which way to go at this crossroads, all the country can do is wait.
Banks pushed into swaps. On the market frontlines, meanwhile, the central bank’s regular weekly bulletins and the IMF-defined daily balance sheets have provided some insights on what is going on with its reserves. The national lender has basically been pushing local lenders into Turkish lira (TRY) against dollar swaps with a one-week maturity after it scrapped its one-week repo auctions on March 25, the first day of the latest market turmoil to engulf the Turkish economy.
Since that day, the central bank has gradually increased the lira swap sale limit for local lenders to 40% from 10% for transactions that have not matured. The regulator obviously needs more FX. Rumours are still flaring that it is short of what it requires because of instances in which it has channelled FX sales through public lenders and other state-run enterprises. Its main line is that it has made standard FX sales to energy importers, but the figures don’t add up.
The central bank’s net international reserves rose to $28.4bn as of April 12 from $27.9bn as of April 5, according to Reuters’ calculations.
There are no clear explanations for how it is that the central bank’s reserves rose while the lira was being suppressed to prevent a sharp depreciation. The most logical explanation seems to be that the rise was thanks to temporary funds obtained from local lenders via swap transactions while the lenders’ lira swap sale limits reached 40%.
‘Ponzi scheme’. The central bank's ‘Ponzi scheme’ does not seem that promising as the mathematical limit on hiking the swap limits stands at 100%.
After March 22, the central bank’s weighted average cost of funding gradually reached 25.5% as of March 29 from the current policy rate of 24% at the one-week repo window. It stayed there until April 4 before gradually returning back to 24% as of April 19. The regulator imposed interest of 25.5% on the lira it provides to local lenders at the swap window while it paid 2.25% on the lenders’ dollars. It also provided direct liquidity to local lenders through the overnight lending window at the same interest rate of 25.5%.
L ocals’ total FX deposits at local lenders declined by a limited $592m to $181.3bn as of April 12 from an historical record of $181.9bn as of March 29. Individuals’ FX deposits declined by $586mn 108.7bn from a record of $109.3bn.
7 TURKEY Country Report May 2019 www.intellinews.com