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2.3 Capital outflows: foreigners’ share of domestic government paper falls to 6%
Net portfolio flows to Turkey remained below zero for 17 consecutive weeks from December 20 to April 17, with the total volume amounting to $7.95bn.
The period from December 23 to April 17 saw $5.36mn flow out of domestic government bonds, bringing the non-residents’ share in the securities to 6% as of April 17 from the more than 10% recorded at the end of January.
Non-residents in Turkey still held $8.25bn worth of domestic government paper along with $22bn worth of equities as of April 17. They also still owned 61%, or $43bn, of sovereign eurobonds and 81%, or $40bn, of corporate eurobonds.
The Q1 outflows of around $62bn from emerging markets were roughly twice the size of outflows recorded at the peak of the 2008 global financial crisis, the Institute of International Finance (IIF) said on April 2 in a note entitled “COVID-19 Capital Flow Exodus from EM”.
March saw a record-breaking $83.3bn in portfolio outflows from emerging markets, the IIF added on April 1 in a note entitled “The COVID-19 Cliff”.
The bad news for Turkey and its peers is that markets may be starting to refocus on the coronavirus (COVID-19) growth hit to emerging markets, which—even after the unprecedented Q1 outflows—could start a second wave of outflows, it said.
Rising FX deposits do not create real FX demand as at the end of the day they are mere bank records. They act to absorb FX demand from locals, but non-resident real persons withdrew a total of $3.5bn from the local banking system in March, emerging as a new source of real FX demand.
2.4 FX reserves
Turkey’s gross FX reserves fell to $54bn as of April 17 from $77bn at end-February, according to the latest official data from the central bank. The net reserves, excluding gold and swaps, have remained below zero since the end of February.
“Turkey spent $40bn in 2019 propping up the lira to contain inflation and has blown another $20bn 2020 ytd. State banks blasted their way through another $1.5-2bn yesterday to undergird its currency but you simply cannot buck the mkt forever,” Julian Rimmer of Investec said on April 2 in a note to investors.
The central bank increased the limits on lira-to-forex swaps by banks to 30% of their foreign exchange market transactions from the previous 20%, Reuters reported on April 3.
The amendment will bring about an increase of around $5bn in lira-to-forex transactions, according to two unnamed bankers.
FX deposits held at local lenders fell to $225bn as of April 17 from $233bn as of March 6, emerging as a new source of real FX demand.
“Financial alchemy”. “All the market focus is on the GIR [gross international reserves], NIR [net international reserves] and FX deposit data to see the decline in reserves and whether FX reserves are still staying in the system, to continue to facilitate the CBRT’s [Central Bank of the Republic of Turkey’s] financial alchemy of taking FX reserves from one pocket to put in another to
8 TURKEY Country Report May 2020 www.intellinews.com
