It was only a few days ago that I looked at the Turkish Lira and pointed out that recent moves were more like a devaluation in the era of fixed exchange-rates than one from the era of floating ones. The ordinary pattern for such things is that you get a sharp move which overshoots as those with positions the wrong way are forced to close and then there is a recovery of sorts. This time around that lasted for all of one day! The reason why we have an abnormal pattern was reinforced last night as Ahval explains.
Turkish Treasury and Finance Minister Lütfi Elvan resigned from his post overnight on Wednesday amid rifts within the government over interest rate cuts that have brought record losses for the lira and higher inflation.
The lira fell as much as 2.1 percent to 13.53 per dollar on Thursday, taking losses this year to 45 percent. It was trading down 1.5 percent at 13.45 per dollar at 11:13 a.m. in Istanbul.
That is in fact a different spin on a story which was reported over here as the minster being sacked. Either way this is how it is being reported in Turkey.
Turkish President Recep Tayyip Erdoğan announced Elvan’s departure in an overnight decree and replaced him with Nureddin Nebati, his deputy at the finance ministry. Nebati is known for his close relationship with Elvan’s predecessor Berat Albayrak, who is Erdoğan’s son-in-law.
This is particularly extraordinary because of what had happened earlier yesterday as we returned to my devaluation theme.
Currency Intervention
The central bank or CBRT had announced this earlier in the day.
Due to the unhealthy price formations in the exchange rates, direct intervention is made in the market in the direction of selling. It is made available to the public.
There was some surprise ( as far as you can be surprised by Turkeys actions in this area) because of the situation.
The central bank spent some $128 billion of its foreign currency reserves last year to prop up the lira, engaging in swap transactions with state-run banks. The spending meant its reserves, net of liabilities, plummeted into negative territory. State-run banks intervened in the currency markets last week, when the lira hit a previous record low of 13.52 per dollar, Reuters reported. ( Ahval)
The situation facing the currency reserves has two issues. If you start with the previous effort it is now a long way offside so there are losses there and they are large. Plus they borrowed some of the money so they have to pay for that as well.
Let us run through the maths and we can start with what is called gross reserves.
Official Reserve Assets recorded USD 123.9 billion indicating 2.2 percent increase compared to the previous month.
So far so good as gross reserves look large and are rising. But there are both losses to account for plus the borrowing.
Short term predetermined net drains of the Central Government and the CBRT (foreign currency loans, securities, FX deposit liabilities) increased by 3.8 percent to USD 25.6 billion, of which USD 19.9 billion in principal repayments and USD 5.7 billion in interest payments. Additionally, outstanding FX and gold liabilities arising from the CBRT’s financial derivative activities with resident and non-resident banks recorded USD 68.3 billion, of which USD 26.6 billion is due in one month.
So there is interest to pay on the borrowing as well as some settling up plus the use of derivatives. But that is not all.
Contingent short-term net drains on foreign currency consists of “collateral guarantees on debt due within one year” and “other contingent liabilities (“Required Reserves in Blocked Accounts in Foreign Currency and Gold” and “Letters of Credit” items in the CBRT’s balance sheet). These liabilities recorded USD 53.2 billion increasing by 6.9 percent compared to the previous month.
So the net position was negative to the order of around 24 billion US Dollars. That will be worse now in US Dollar terms and remember these have to repaid with ever more Turkish Lira. More recent updates had put the negative net reserves position at 35 billion US Dollars which is presumably why this was in the news only last week.
Turkey is reportedly seeking to increase the foreign currency reserves possessed by its central bank, in a currency swap agreement with the United Arab Emirates that could amount to at least $5 billion. ( middleeastmonitor.com )
Trade Figures
These have just been released by the Turkish Statistical Institute.
According to the provisional data, produced with the cooperation of the Turkish Statistical Institute and the Ministry of Trade, in October 2021; exports were 20 billion 792 million dollars with a 20.1% increase and imports were 22 billion 230 million dollars with a 12.8% increase compared with October 2020.
So we have a deficit in spite of all the past currency falls and that is true for 2021 so far.
In January-October 2021 period, exports were 181 billion 673 million dollars with a 33.9% increase and imports were 215 billion 533 million dollars with a 22.5% increase compared with January-October 2020.
That is a little awkward for the “competitiveness” line coming from the government. Actually if we stick with imports there will be a couple of factors in play. First there will have been higher energy and oil costs as Turkey is a large importer of them and on the other hand some will have not bought other imported goods due to price rises as the Lira was beginning its fall.
Inflation
This is a worldwide issue which will be exacerbated by the currency fall.
Inflation in Turkey’s largest city of Istanbul accelerated to an annual 24.1 percent in November, the highest level since 2003, BloombergHT television reported on Wednesday, citing data from the Istanbul Chamber of Commerce.
Retail prices rose by 4.71 percent month-on-month, it said. Wholesale prices increased by 6.77 percent from October. ( Ahval)
This works against the competitiveness argument as costs of production rise, most noticeably right now energy costs.
Turkish Banks
These will be having all sorts of problems. The first issue is those that have been intervening on behalf of the state. So far they seem to have been paid on derivative transactions but there is a clear risk. Next comes the issue of how they deal with businesses who have borrowed abroad in US Dollars and other currencies?
Central bank data shows private sector loan debt from abroad stood at $171.6 billion at the end of September, with some 60% of the debt owed by non-financial companies. ( Reuters )
Then there is also this.
Turkey’s banking watchdog BDDK says banks have $160 billion worth of foreign currency loans as of Nov. 18. ( Reuters )
There are issues for banks beyond Turkey as well
Spanish banks have by far the largest loan exposure to Turkey among Western lenders at nearly $63 billion, followed by banks in France, Germany, Britain, United States, Japan and Italy, data from the Bank for International Settlements (BIS) shows. ( Reuters)
We looked at BBVA of Spain last time and it is looking at the bright side.
MADRID (Reuters) -The chief executive officer of Spain’s BBVA (MC:BBVA) said on Monday that the weaker Turkish lira has reduced the price of its deal to buy 50.15% of Turkish lender Garanti by more than 400 million euros at current exchange rates.
Shame about its existing holdings though….
Comment
This has the potential to be quite an explosive event. The plunge in the Lira is combined with interest-rates of 15% so the domestic economy must be shell-shocked. The problem with the competitiveness argument is that Turkey has to produce so much more just to cover the currency fall and that is happening at a time of worldwide supply shortages. In theory Turkey is in terms of exchange-rate extremely competitive for people to holiday there so tourism should boom. But there are issues with restrictions around the Omicron variant and the risks of going to a country which feels like a boiling pot.
Whenever this calms down some will come back for the 15% interest rate to pick up the carry but for now that has been dwarfed by the falls. A recession is possible but the GDP data may miss it because we will see falls in imports which boost GDP. Also the GDP numbers will look very different in US Dollars or in fact pretty much any currency which is not the Turkish Lira.