Turkey burns through foreign reserves to shore up lira

Turkey burns through foreign reserves to shore up lira

Turkey has burnt through around a third of its foreign reserves this month in an effort to contain currency weakness ahead of local elections this weekend, spooking investors and sending the lira sliding on Thursday.

New weekly data published by the Turkish central bank showed foreign reserves dropped TL13bn last week, bringing the total decline for March to TL45.1bn. When converted into dollars, the fall in the first three weeks of March was roughly $10bn, or 29 per cent, leaving the reserves at about $24.7bn, FT calculations show.

The renewed weakness in the currency added to this week’s turmoil in Turkish markets, which for investors carries an uncomfortable echo of last summer’s lira crisis that scarred the economy.

“It was yet another sharp fall in the already-low reserves,” said Piotr Matys, an emerging market currency strategist at Rabobank. “This sharp fall implies that the central bank has been intervening over the past few weeks, trying to keep the lira relatively stable ahead of crucial local elections.”

The lira was down as much as 5 per cent to TL5.611 on Thursday.

Increasing appetite among the Turkish public for dollars and euros has sharpened the downward pressure on the currency. New data released on Thursday showed that residents’ foreign currency savings crept higher in the third week of March, reaching $164.8bn.

Adding to the unease among market participants, Recep Tayyip Erdogan launched a new tirade against high interest rates as he accused the west of attacking the country’s economy.

The Turkish president, a well-known opponent of high interest rates, repeated his unorthodox view that high rates cause rather than curb inflation. “The fundamental issue is interest,” he told a gathering of university students at a campaign event in Ankara.

“When interest comes down, inflation will come down . . . I am also an economist.”

Mr Erdogan said that the volatility of the past days was also the fault of outsiders. “All of this is an operation to put pressure on Turkey by the west, especially America,” he said.

The remarks come ahead of crucial local elections this weekend. Mr Erdogan is worried that voter discontent over high inflation and rising unemployment could see his ruling party lose control of some big cities, including the capital, Ankara.

Earlier this week Turkey made an apparent attempt to stymie short selling of the lira by effectively locking foreign investors out of a key portion of the market.

Central bank governor Murat Cetinkaya sought to reassure markets on Thursday by telling the state-run Anadolu news agency that net foreign-currency reserves had risen in the final week of the month. Late on Wednesday, Turkey’s banking association (TBB) denied claims that the country’s lenders had been limiting or halting sales of lira to foreign banks.

But one London-based analyst, who asked not to be named, told the FT this week that Turkish banks told him they had been ordered “not to lend even a single lira to foreign counterparties”.

The squeeze had sent the cost of borrowing lira soaring for foreign banks and hedge funds. The offshore overnight swap rate — a proxy for the cost of borrowing lira — had soared to 1,200 per cent. It eased substantially back towards its normal levels of around 35 per cent by midday on Thursday.