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budget deficit is deeper than expected, the report cited the sources as saying. The move would simply amount to boosting lira supply, or more frankly the old- style printing of money, at a time when public lenders are already selling USD to curb the depreciation of the local currency and the central bank is employing indirect tightening tools, once more scrapping one-week repo auctions and hiking reserve requirements. Inconsistency and seeming chaos are bedevilling the Turkish government’s economic policies, but you could say that has been the case for quite a long while now with its policies on all fronts. The dosage of chaos continues to incrementally increase. “President Recep Tayyip Erdogan's mishandling of his country's currency crisis heightens substantially the probability that Turkey will soon default on its external debt. That could jeopardise the rest of the emerging market economies' prospects as well as European banks, particularly in Spain, with high Turkish debt exposure,” Desmond Lachman wrote on May 14 in an op-ed for the Official Monetary and Financial Institutions Forum (OMFIF) entitled “Turkey headed for debt default”. “Concerns about financial stability in Turkey and Argentina have resurfaced again in recent weeks but, while both countries face huge challenges, they are too small to pose a significant threat to the rest of the world economy,” Neil Shearing of Capital Economics opined on May 13 in a research note entitled “The changing face of EM debt risks”.
Turkey ‘scraps plan’ to transfer central bank legal reserves to state budget. Turkey has reportedly scrapped a plan to tap its central bank’s legal reserves to boost its budget, while its banks have been urged to encourage clients to convert foreign holdings. Both steps are aimed at protecting the beleagured Turkish lira, down around 13% in the year to date with economic and political negatives taking another toll. Reuters reported how the Turkish lira (TRY) took a knock early last week after it released a report saying Ankara was crafting legislation to transfer some TRY40bn ($6.6bn) from the central bank’s legal reserves to the Treasury to shore up a larger than expected budget deficit. But on May 17, two sources told the news agency that the plan had been abandoned, with one saying: “It has been cancelled for now.” Economists were concerned that transferring the reserves would undermine the central bank’s ability to respond to another TRY crisis, following the currency crisis of last year, a 12 months in which the currency lost 28% of its value versus the USD. They also fretted that the plan would provide a one-time fiscal boost before the re-run of the Istanbul mayoral election on June 23, after which the economy could experience a tightening. The message to banks to persuade clients to convert FX deposits came from Mehmet Akben, chairman of the country’s BDDK banking watchdog. He said the currency was under attack from “speculators”, a well-worn theme often voiced by Erdogan administration officials. “For example, [banks’] branches being given premiums for holding lira deposits can be an option. Branches can be assigned targets,” Akben said, speaking of his call for efforts to achieve the conversion of customers’ hard currency deposits to lira. Ankara has little have room to boost spending ahead of the Istanbul revote given that budget revenues are low, analysts say. The central bank is legislatively bound to set aside “legal reserves” from profits to be used in extraordinary circumstances. They are separate from its forex reserves, which have diminished in recent months. At the end of 2018, the central bank legal reserves officially stood at TRY27.6bn. In January, the national lender transferred some TRY37bn in profits to the Treasury, three months earlier than scheduled. Despite that boost, Turkey’s budget recorded a TRY54.5bn deficit in the first four months of this year, Treasury and Finance Ministry data showed. The government’s forecast for the 2019 year-end deficit is TRY80.6bn.
Talk of a Turkey default grows as spooked investors ask ‘What comes next?’
49 TURKEY Country Report June 2019 www.intellinews.com