The lira has tumbled 21% against the dollar this year, the worst performance after Brazil’s real among 24 emerging market currencies

Bloomberg
Istanbul



For an insider’s view of the topsy-turvy world of Turkish banking, open a savings account.
Lock your liras away for more than a year and you’ll get an 8.5% return, but limit that to just up to three months and you’ll earn an annualised 11.2%.
The anomaly is a symptom of the reluctance among Turks to tie up their cash as the lira keeps weakening to records amid political instability and growing security concerns. Turkey has one of the lowest levels of household savings among the Group of 20 most industrialized nations, and banks finding alternative sources of funding more expensive are resorting to offering ever-higher rates to entice customers.
“Banks had to adjust rates so that at least some depositors can be convinced to stay in the Turkish lira,” said Aykut Ahlatcioglu, an analyst at Istanbul-based brokerage Oyak Yatirim.
The lira has tumbled 21% against the dollar this year, the worst performance after Brazil’s real among 24 emerging market currencies, as fighting escalated in neighbouring Syria, a three-year cease-fire with Kurds fell apart, and inconclusive elections mid-year left the country without a majority-led government.
Turks return to the polls next month for a repeat of those elections.
Turkish assets have also been caught up in a global selloff in emerging markets sparked by concern over a world-wide economic slowdown and the prospect of higher interest rates in the US.
Households and businesses have responded by buying foreign currencies. “There’s an acute shortage of Turkish lira deposits in the system,” according to Ercan Uysal, co-founder of Istanbul-based research firm Integras. The International Monetary Fund predicts Turkey’s domestic savings rate will fall to the lowest among the Group of 20 nations this year.
Turks hold 45% of their savings in foreign exchange, the highest proportion in more than a decade, according to the banking regulator. Banks had a total of 502bn liras ($168bn) of local-currency time deposits in June, 90% of which were held in accounts with maturities of three months or less, the latest central bank data show.
While shorter-term deposits have traditionally paid more than longer-term accounts, at least for the past five years, the spread between the two has widened to the most since a government corruption scandal sent the lira plunging in January 2014, according to data compiled by Bloomberg. The three-month deposit rate jumped to as high as 11.4% last month, the most since April 2014.
“People will not go to a longer maturity even if they pay higher rates,” Erkin Isik, a strategist at Turkiye Ekonomi Bankasi AS in Istanbul, said by e-mail. Banks “have to pay high interest due to the lack of savings, and clients demand short maturities,” he said.
The banks’ scramble for local currency is made more urgent by the fact that the costs associated with borrowing in dollars or euros and converting that money back into liras have surged. The rate on interest-rate swaps has climbed more than 260 basis points this year, hovering near 11% for three-month swaps. The swap rate reached a six-year high of 11.89% on September 7. Turkish banks will be forced either to compete for an increasingly expensive pool of funds or further curb lending, according to Moody’s Investors Service.
Growth in consumer loans fell to about 13% year-on- year in September, according to the latest data from the banking regulator, less than half the average pace since 2010. The slowdown in lending comes as the economy is forecast to expand 2.8% this year, the least since 2012.
“Turkish banks are likely to scale back their lending as funding becomes scarcer,” Irakli Pipia, an analyst at Moody’s, said in a report on October 1. The squeeze in deposits may act as a drag on balance sheet growth over the next 18 months, he said.


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