Petrotahlil - Turkey’s defense of the lira sent central bank net international reserves to the lowest level since last May even after it borrowed a record amount of foreign exchange from local lenders.
To bulk up its stockpile during the intervention, the central bank has been borrowing from local lenders and booking the liabilities from these transactions off its balance sheet. Since December, the total stock of currency swaps with a maturity of up to a year increased by $11.4 billion to $29.6 billion through the end of March, according to data published Tuesday.
Since then, it borrowed around $3 billion more from banks through mid-April, according to Bloomberg calculations. Yet Turkey’s hard-currency buffers dropped by $15.2 billion from the start of the year to $25.9 billion through April 17, which brings net reserves stripped of these liabilities to lenders deeper below zero.
The central bank says it’s misleading to focus on net figures and urges investors to consider its gross holdings, which include gold and liabilities such as local banks’ required reserves. By that measure, the total fell by more than $18 billion since the beginning of this year to $87.9 billion.
“The central bank’s reserve position is not reassuring,” said Kaan Nazli, a senior economist and portfolio manager helping oversee $26 billion of assets at Neuberger Berman in The Hague.
Facing foreign outflows as the economy sputters amid the coronavirus outbreak, Turkey is making a stand over the currency by relying on state lenders to flood the market with dollars. The effort put the brakes on declines in the lira last month, when it weakened under 6% against the dollar, less than half the depreciation of its peers in emerging markets such as South Africa’s rand, Russia’s ruble and the Brazilian real.
Turkey began supporting the lira before key local elections last year, and has stuck by the costly currency defense despite pressure from geopolitics, massive interest-rate cuts and, lately, the coronavirus outbreak.
The subsequent drawdown in reserves has spooked investors, who worry that Turkey may not have enough of a cushion to shoulder a disruption in external financing.
“The main worry is that there is a pick-up in external debt repayments ahead while the tourism sector is not in a position to attract flows due to the lockdown,” Nazli said. While banks are “always in a good place” to refinance their debt, the pressure will be stronger on the non-financial sector, he said.
Just under half of the $168.5 billion of foreign-currency debt maturing in the next 12 months are bank liabilities, according to the latest data published by the central bank. In comparison, the government only has $4.4 billion of debt to roll over in the same period.
The lira slipped 0.2% to 6.9981 per dollar as of 3 p.m. in Istanbul on Tuesday, testing a key level that state banks were defending last week after the central bank cut its repo rate by more than expected.
At the current rate of depletion, the central bank would “eat into its FX reserves ex-gold by mid-June, and into total reserves including gold by the 3rd week of July,” said Cristian Maggio, the head of emerging-market research at TD Securities in London. Turkey is unlikely to burn entirely through its liquidity buffers before delivering dramatic rate tightening, possibly introducing tight capital controls or seeking multilateral support, Maggio said.
Like the central bank, Fitch Ratings is reassured by focusing on gross reserves, which include local banks’ foreign-currency holdings at the central bank.
As long as Turkish lenders continue to have access to such placements, “which we think they do,” and given that the bulk of the country’s external financing needs sit with local banks, it makes more sense to take gross reserves into account, Douglas Winslow, a London-based analyst at Fitch, said in a teleconference last week.
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