Cyprus Economy Bank: FX turbulence stopped by CBRT measures; stock market collateral damage

Turkish financial markets ended yesterday with an unpleasant tone. At first you may think that the preceding sentence may be related to the  turbulent foreign exchange market, but this time the subject is different. As you may remember, the rapid meltdown in the  Central Bank of Turkey’s (CBRT) net foreign exchange position last week caused domestic residents to panic. When the rate of increase in the USDTRY exchange rate gained momentum due to the foreign exchange demand which was compounded by concerns about post-election economic policy,  CBRT acted proactively taking drastic measures.

While the proactive and harsh measures taken by the monetary authority with the expectation that a faster rise in the exchange rate vis-a-vis inflation would disrupt the disinflationary process have calmed down the waters significantly in the foreign exchange market in recent days, its side effects  began to appear at once.

CBRT’s measures quantitative tightening measures triggered loan interest rates to rise rapidly it took stocks faced severe  selling pressure yesterday.

To give a simple example from the field of medicine, a prescription written by a doctor tries to treat a disease in one part of the body, but creates a problem in another. While the BIST 100 main index closed the day with a 1.8% decrease yesterday (it also decreased by 0.3% on Thursday), the BIST Banking index fell by nearly 4% after the CBRT announced new reserve requirement steps that will tighten the TL liquidity in the banking system and create an upward effect on deposit rates.

The spread between Interbank and the Grand Bazaar spot foreign exchange market narrowed in line with the volatility decreasing compared to last week, the USDTRY exchange rate was traded at 32.10 throughout the day in the interbank market yesterday vs. a selling rate of 32.5 at Closed Bazaar.  Additionally the TL-settled forward contracts transaction volume decreased, attesting to calmer demand from corporates.


In other news, International Credit Rating Agency Fitch held a teleconference yesterday after raising Turkey’s rating to B+, with a positive outlook. Fitch predicted that the policy rate would rise to 50% after March and end the year at 45%. Fitch’s USDTRY year-end exchange rate forecast is at 38, close to our prediction of 40, and coincides with the  monetary authority’s stated policy of  real appreciation of TL.  E

External financing difficulties and high inflation are seen as among the main factors preventing Turkey’s rating from increasing further. It is noted that the level and composition of CBRT reserves will be important in the future. It is estimated that Türkiye will grow 2.8% in 2024 with an inflation rate of 57.7%. No significant change is expected in the basic scenarios of post-election economic policies.

In the news flow yesterday, we saw that the Treasury authorized banks for  a 6-year EUR bond. Most likely, they want to benefit from the optimistic atmosphere brought about by Fitch’s rating increase and the positive market conditions brought about by the CDS risk premium being just above 300 basis points. The issuance is expected to be completed today.


Post Note:  The extra risk premium demanded on the junk-rated nation’s bonds in euros fell to as low as 104 basis points on Feb. 26, the lowest since 2007, according to a Bloomberg index tracking Turkish debt spreads. It stood at 123 basis points on Wednesday against a 10-year average of 359 basis points.


The anticipation of interest-rate cuts by the Federal Reserve and the European Central Bank has helped reignite interest in higher-yielding assets. Alongside the Turkish Treasury, the country’s wealth fund has taken advantage of increased global appetite for risk. In February, it sold an inaugural $500 million, five-year bond at a yield of 8.4%.


Meanwhile, the Treasury has discussed with bankers a potential buyback of short-term dollar bonds to switch them out with debt at longer maturities, according to four people familiar with the matter–Bloomberg.


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Published By: Atilla Yeşilada

GlobalSource Partners’ Turkey Country Analyst Atilla Yesilada is the country’s leading political analyst and commentator. He is known throughout the finance and political science world for his thorough and outspoken coverage of Turkey’s political and financial developments. In addition to his extensive writing schedule, he is often called upon to provide his political expertise on major radio and television channels. Based in Istanbul, Atilla is co-founder of the information platform Istanbul Analytics and is one of GlobalSource’s local partners in Turkey. In addition to his consulting work and speaking engagements throughout the US, Europe and the Middle East, he writes regular columns for Turkey’s leading financial websites VATAN and and has contributed to the financial daily Referans and the liberal daily Radikal.