Turkey’s surprise tightening of monetary policy in response to a plummeting Lira was forced by a sudden drop in official reserves. The attempt did not stem the tide and the currency continued to lose ground to the dollar despite the efforts of the central bank.
A statement late Friday by an official from the central bank said that the drop off in official reserves was nothing out of the ordinary and further went on to explain that it was due to foreign debt repayments and hard currency sales to energy companies.
The currency tumbled by as much as 5.8% on speculation that the central bank was using its reserves to prop up the currency before the elections. The central bank pushed lenders to its more expensive overnight borrowing facility in a bid to stem the tide, with the currency instead 4.9% lower by 8:23 P.M. in Istanbul time. The price at the time was 5.7457 Lira to the Dollar.
One of BlueBay Asset Management’s strategists in London stated that the move by the central bank was simply to buy time. More importantly, he stated that this “could the last chance for the current central bank management to prove themselves”, a sentiment that seems to be shared by the wider forex community.
The decline of the Lira in the last three months has reached 7%, a position that has been brought about due to the market’s uncertainty over the policy direction of the central bank after the election. The risk of worsening tensions between Turkey and the United States is adding to this, with Turkey looking to buy a missile defense system from the Russian adding more tension to the existing problems.
Emergency Interest Rate Hike
Steps taken by the central bank had already increased benchmark interest rates by 625 basis points in September but is looking to use the next two funding windows to sell at 25% and 27% respectively.
Nomura Plc, London strategist Henrik Gullberg explains the current mood of the market by noting that the reserves have fallen by 6.3 billion dollars whereas the Treasury’s external debt repayments were only 3.8 billion dollars for the same period. He added that this type of discrepancy can only be seen by the market as an intervention.
The central bank firmly stands by the explanation that it was additional hard currency sales to energy companies that resulted in the imbalance.
JPMorgan, in a note to clients, said that they believe this rate of FX reserve loss is not sustainable. Additionally, they have recommended investors to go long on the Lira, as they are certain that post-election reserve support will fall, leading to the USD/TRY trading significantly higher.
The slump is also being made worse by indications that local investors are going the route of buying foreign currencies due to fears that inflation will cut their Lira savings. Turkish households and companies, in the week ended March 15, had already bought $4 billion of hard currency due to these fears. It is the most since 2012 and it has driven the holdings of this group to a record high of $175.8 billion.
Effects in the local market have been felt by the largest lenders, who have led the decline in the Borsa Istanbul 100 Index. The decline has been ongoing since August.