Emergency measures announced by President Recep Tayyip Erdogan last month helped the Turkish lira post a relatively calm start to 2022 after a chaotic December, even as analysts remain deeply uncertain about its outlook.
New government-backed savings plans unveiled by authorities – combined with other measures, including a multi-billion dollar central bank intervention – have restored temporary stability. But few analysts see these solutions as a lasting solution to Turkey’s monetary dilemma, given Erdogan’s determination to keep interest rates well below the country’s skyrocketing rate of inflation.
“I see it as electroshock therapy,” said Emre Akcakmak, managing director of Greenwest Consultancy in Dubai. “The patient was on the verge of being lost and now he has come back to life. But did it cure the patient? I don’t think this is a long term solution.
Erdogan’s order for the central bank to cut rates four times, despite rising inflation, sent the pound plummeting in the final months of last year. As it threatened to spiral out of control in mid-December, crashing to record lows of TL16, TL17 and TL18 to the dollar, the president unveiled a state-backed savings scheme aimed at luring savers Turks to the national currency.
Interest in the products, which promise to compensate savers who hold lira for any exchange rate losses they suffer, has been limited so far, though steadily increasing. As of January 24, TL 196 billion ($14 billion) had been transferred to the new mechanisms out of total banking sector deposits of TL 5.4 billion, according to data shared by the Ministry of Finance with the Financial Times. .
Less than 30% of this change was caused by savers converting their dollar and euro holdings into local currency.
Still, the announcement helped push the lira back down from all-time lows and was followed by an unusual window of calm. The currency, which lost 44% of its value against the dollar last year, is down just 2% since the start of 2022, according to data from Refinitiv. That compares with a decline of around 0.01% for MSCI’s Emerging Markets Broad Currency Indicator.
The rush of Turks to buy dollars, euros and gold, a phenomenon that puts pressure on the lira, has also cooled. Residents’ foreign currency deposits fell for three consecutive weeks through Jan. 14, central bank data showed.
Uptake of the savings plan could be further boosted by businesses, which were invited to join on January 11 and offered a tax incentive to participate. Paradoxically, however, an over-enthusiastic signature would heighten concerns about the cost of the mechanism to the state, which will foot the bill for any exchange rate losses.
While Turkish officials hailed the project as a triumph, some analysts believe the lira’s central bank is continuing to spend the country’s foreign exchange reserves to support the lira, albeit at a slower pace than in December. when it burned at least $7 billion. .
Ibrahim Aksoy, an analyst at HSBC in Istanbul, says authorities could use proceeds from new regulations, introduced in early January, which require exporters to sell 25% of their foreign exchange earnings to the central bank.
Aksoy said the measure, which bankers said has already come into effect, is expected to contribute about $1.25 billion a week to central bank reserves based on exports of about $20 billion in January. But no such increase has been observed.
“The stability of the lira comes from both the short-term partial success of the savings mechanism and the fact that the central bank is likely to support the lira,” Aksoy said.
Others cite different reasons for the quietness seen in Turkish markets. An Istanbul-based senior banker, who asked not to be named, said he saw a significant push to defend the 13.8 TL level against the dollar – but saw no signs of intervention in financial markets over the past week.
He said “very low” trading volumes meant that “the pound can appreciate even with small trades compared to the past”. He added that major Turkish companies complained of being pressured by the authorities to avoid making large purchases of foreign currency if possible.
Erdogan, who enjoyed a slight rebound in his approval rating as markets stabilized this month, has previously said the savings plan was a big success. Speaking last week, he said he had “skimmed the scum” off the exchange rate, adding: “We don’t think we will experience a return to the excessive volatility that stems from demand for foreign currency unbalanced in the markets”.
Central bank governor Sahap Kavcioglu said on Thursday that the government’s “lira-ization” plan would combine with growing exports, investment and employment to bring down inflation which stood at a two-decade record 36% in December — a strategy that has been met with skepticism from economists given the country’s deeply negative real interest rates.
Analysts warn that a host of factors could upset the delicate balance. Guldem Atabay, an analyst at research platform Istanbul Analytics, said authorities appeared to be banking on the idea that a strong tourist season in 2022 would bring in enough foreign exchange earnings to eliminate the country’s trade imbalance, which has long been a source of pressure on the pound. .
She warned that impending rate hikes by the US Federal Reserve could suck capital out of emerging markets and said a likely rise in Turkey’s inflation rate in the coming months could prompt Turks to start buying again. dollars.
“They think they’re very successful at repelling depreciating forces,” she said. “But I’m afraid it will backfire on him in the medium term.”