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2.0 Politics
2.1 A thinking exercise on Turkey and its lira
The dollar to the Turkish lira rate has gradually descended since an all-time high of 7.27 was hit on May 6. In tandem with that trend, the financial media has been dominated by headlines suggesting that Turkey’s currency was recovering thanks to news of the Turkish central bank entering into talks with counterparts in various parts of the world to secure hard currency swap lines.
Unfortunately, the reports did not specify who exactly was buying Turkish lira (TRY) in response to the swap rumours; it would be rather handy to have this information because even if the speculation that swap talks were advancing was correct, as a matter of fact no swap line could actually help solve the lira’s fundamental problems.
Moreover, lagged data shows that foreign portfolio outflows from Turkey have continued and locals’ FX deposits have risen, while the FX reserves have declined. FX deposits at local lenders, of course, don’t amount to more than “bank records” that act to absorb real FX demand. But the indicator does show that the Turks have been in no rush to sell their dollars in exchange for lira.
Burning through reserves
The Turkish central bank has raised the FX-to-TRY swap market transaction limit of Turkey’s lenders to 50% of their FX market transaction limit from the previous 40%, Reuters reported on May 22.
On May 5, the figure had been raised to 40% from 30% in a move that came two weeks after the national lender upped the limit to 30% from 20%.
A 10pp increase in the limit translates to tapping around an additional $5bn from the local lenders, financial media reports have suggested.
As of May 15, the lenders had a total of $16bn in additional FX liquidity ($5.4bn at home and $10.5bn held in foreign bank accounts). This figure stood at $19bn as of May 1 and at more than $20bn in April. The figure declines as the central bank increases the banks’ swap limits.
The lenders actually had $85.3bn worth of FX liquidity as of May 15 but
6 TURKEY Country Report June 2020 www.intellinews.com
