Page 34 - bne_April 2021_20210401

34 I Cover story bne April 2021
Running on fumes: Turkey's dire external position
Turkey has almost run out of money and is running on fumes. The current account deficit stood at 5.1% of GDP last year as tourism receipts slumped and a strong recovery in the second half of 2020 fuelled imports. Turkey also has large short-term external debts, equal to $190bn (26.7% of GDP), almost half of which is owed by banks. These make Turkey dependent on capital inflows and vulnerable to tighter external financing conditions.
The picture looks even more concerning when put in the context of Turkey’s depleted FX reserves. Even on the most flattering gross measure, reserves amount to $95.7bn or around half of short-term external debt. Reserves were depleted over the course of last past year as the Turkish Central bank (CBRT) intervened to prop up the lira." says Jason Tuvey, an economist with Capital Economics.
"What’s more, Turkey’s gross reserves are distorted by commercial bank’s foreign currency deposits held at the CBRT under the “reserve option mecha- nism” (which allows banks to hold FX as required reserves against lira liabilities). These boost the CBRT’s foreign currency assets as well as foreign currency liabilities; stripping out these effects, net reserves stand at around $11bn, their lowest since 2003!" adds Tuvey.
The state of the CBRT’s balance sheet looks worse still after factoring in its FX swap transactions. The CBRT has been entered into swap contracts with commercial banks in recent years, selling lira in exchange for dollars with an agreement to sell dollars back at the forward exchange rate at expiry.
"These operations were a key component of the CBRT’s arsenal to defend the lira last year and, while they have been wound down a little recently, they still stand at more than $53bn. The swaps create an additional source of exposure to lira depreciation. If commercial banks are no longer willing to provide dol- lars to the CBRT to roll over these swap operations, the CBRT’s depleted FX reserves mean that it would be forced to obtain foreign currency in the spot market – putting even further pressure on the lira," says Tuvey.
"The big picture is that the poor external position means any effort by the CBRT to defend the lira cannot be sustained for long... Officials’ bar for impos- ing capital controls and/or import restrictions appears to be high, but the situ- ation in Turkey is now so dire that they may have little option to turn to such measures if capital flight persists and a severe balance of payments crisis is to be avoided,” concludes Tuvey.
bank held under the so-called ‘reserve option mechanism’. These have not been fully rebuilt over the past couple of years and stand at just over a half of short-term term external debt.”
Illiquid loans
Banks’ other FX assets mostly consist of illiquid loans that cannot be used
to service debts and the CBRT’s low foreign exchange reserves mean that it is not in a strong position to step
in, noted the economist, concluding: “Indeed, the latest figures show that the central bank’s net reserves amount to less than $11bn. To repay maturing external debts, banks would need
to access foreign currency from the spot market, which would put the lira under further downward pressure and cause banks’ balance sheets to shrink and credit conditions to tighten.”
Though Erdogan has a record of dropping grenades under the feet of the markets, his latest intervention in the country’s monetary policy, with the firing of the governor, has left investors puzzled and aghast.
The Economist wrote on March 22: “Unable to keep up with Mr Erdogan’s antics, analysts seem to have given up trying to predict what might happen next.”
It added that the “brutal market reaction may give Mr Erdogan some pause for thought and quoted Paul McNamara, investment director at asset management firm GAM, as saying: “My guess is that it’s going to get through to Erdogan that a country with so much foreign debt does not have the freedom to set interest rates as low as it likes.”
Turkey’s president and the central bank may grudgingly surrender to the markets, McNamara was cited as saying, adding: “There needs to be a realisation they’ve bitten off more than they can chew.”
Turkey's overall short-term foreign debt, falling due in the next 12 months, reached $140bn, about one-fifth of GDP, in January.
www.bne.eu