Turkey took more unorthodox steps yesterday to protect its beleaguered lira, including scrapping a recently-hatched plan to tap the central bank’s legal reserves to boost its budget and urging banks to encourage clients to convert foreign holdings.
The message to banks was delivered by Mehmet Akben, chairman of the country’s BDDK banking watchdog, who said the currency was under attack from “speculators.”
The Turkish lira has come under renewed pressure in recent months as investors fretted about the threat of US sanctions, uncertainty over local election results, declining central bank reserves and a trend of Turks ramping up foreign holdings.
The currency is down 12.5% this year after having shed 30% last year, when a currency crisis tipped its economy into recession.
The lira slid again on Monday after Reuters reported that Ankara was crafting legislation to transfer some 40bn lira ($6.6bn) from the central bank’s legal reserves to the Treasury to shore up a larger than expected budget deficit. But yesterday, two sources told Reuters that plan was now abandoned. “It has been cancelled for now,” said one of the sources, both of whom requested anonymity.
Economists were concerned over the prospect of weakening the central bank’s ability to respond to another crisis.
They also worried that the plan would provide a one-time fiscal boost before the re-run of Istanbul elections on June 23, after which the economy could experience a tightening.
Piotr Matys, emerging markets forex strategist at Rabobank, said that even considering tapping into the central bank’s reserves stoked such concerns, adding its damage on the lira had been done.
“Investors would be wondering what other tools the administration may use to stimulate lending (and) growth at a time when they don’t have much room to manoeuvre,” he said.
Ankara doesn’t have much room to boost spending ahead of elections given that budget revenues are low, Matys added.
The central bank by law sets aside “legal reserves” from its profits to be used in extraordinary circumstances, and they are separate from its forex reserves which have dwindled in recent months.
At the end of 2018, the legal reserves stood at 27.6bn lira, according to the bank’s balance sheet data.
In January, the bank transferred some 37bn lira in profits to the Treasury three months earlier than scheduled.
Despite that January boost, Turkey’s budget recorded a 54.5bn lira deficit in the first four months of this year, Treasury and Finance Ministry data showed.
The government’s forecast for 2019 year-end deficit is 80.6bn lira.
A broader erosion of confidence in the lira has led to an increase in locals’ forex holdings, which surged in the six months leading up to April.
Akben, head of the banking watchdog, called on lenders yesterday to make an effort to turn deposits in foreign currencies into lira.
Asked how banks can do this, he said each bank may have a different method.
“For example, (banks’) branches being given premiums for holding lira deposits can be an option. Branches can be assigned targets,” Akben said.
Customer wait to change currencies at an exchange house in Istanbul. A broader erosion of confidence in the lira has led to an increase in locals’ forex holdings, which surged in the six months leading up to April.
