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7.2bn lira would be withdrawn, the national lender said. Hours before that move the central bank announced it had frozen one-week repo auctions for a period of time. The consequence will be a gradual raising of the average cost of funding under the benchmark one-week repo rate of 24% to the overnight lending rate of 25.5%. Additionally, the central bank pushed up its forex reserve requirement ratios by 100bp, which it said would result in $3bn of forex liquidity being withdrawn from the market. The TRY fell by around 1% in morning trading on May 9 to 6.2460 against the dollar—its weakest level since September 24—but was trading in the 6.19s by the end of the day. The TRY has lost 15% of its value against the dollar this year to date, having lost 28% in 2018. Jason Tuvey, senior emerging markets economist at Capital Economics, was quoted by Reuters as saying the moves had not provided permanent support for the lira because investors believed they showed that President Recep Tayyip Erdogan was still influencing monetary policy. “The central bank’s moves suggest it is under political pressure to not hike interest rates so it has to go through the backdoor in order to avoid the wrath of President Erdogan,” he said. Investors are worried that the decision to repeat the Istanbul election, with a poll scheduled for June 23, will add nearly two months of uncertainty over Turkey’s plans to rebalance and stabilise its imperilled economy. “Erdogan cannot really afford to lose again in Istanbul so he will do what is necessary to win the elections,” Guillaume Tresca, senior emerging markets strategist at Credit Agricole, was reported as saying. He added that the government is likely to favour credit growth and increase public spending to garner support. The cost of insuring exposure to Turkey’s sovereign debt rose on May 9, with five-year credit default swaps jumping 11bp from the previous day’s close to 483bp. Similar levels were seen just before the March 31 local elections. Turkey’s dollar bonds slumped across the curve, with the 2026 issue dropping 1.6 cents, Refinitiv data showed. The yield on the 10-year benchmark bond rose to 21.35% in spot trade from 20.99% on May 8, while the two-year benchmark bond surged to 25.17 from 23.05. The main BIST100 share index was down 1.77%, while the banking share index fell 2.22%. The central bank’s net international reserves fell to $25.84bn in dollar terms as of May 3, data relayed by Reuters showed on May 9, while its gross forex reserves stood at $72.63bn. Analysts feel the regulator would not have the “ammo” to fight another huge slump in the lira. Local investors have also lost confidence after last year’s currency crisis, which caused forex deposits and funds including precious metals of local individuals to rise steadily in the six months to April. Forex holdings of local individuals and institutions fell to $179.18bn as of May 3, down 0.7% from the previous week, official data showed on May 9.
Puzzled market players. Meanwhile, the Erdogan administration’s interventionist management of the currency crisis- and recession-dogged economy continued to puzzle market players on a day when the central bank revived its one-week repo auctions to fund lenders’ at 24% rather than funding them at 25.5% via the overnight window—the method which was in place for around two weeks. The central bank injected TRY17bn ($2.8bn) in the repo. Investors were still weighing up Turkey's banking watchdog decision to impose a one-day settlement delay for FX purchases of more than $100,000 by individuals. Bankers said that move could raise concerns about capital controls. "The administration seems to be increasingly desperate to keep the lira stable at all costs ahead of the re-run of the crucial vote in Istanbul," Rabobank emerging markets forex strategist Piotr Matys was cited as saying by Reuters. "Instead of providing investors with a much needed assurance, such measures will have the opposite effect, as the market will interpret it as rising interference in the banking sector," he added.
Turkey’s central bank sticks to inflation target, sheds no light on FX reserves mystery. Turkey’s central bank has left its end-2019 consumer price index (CPI) inflation forecast unchanged at 14.6%. The national lender announced the decision on April 30 in its second inflation report for 2019.
73 TURKEY Country Report June 2019 www.intellinews.com