Goldman Sachs has warned of possible instability in the foreign exchange market ahead of Turkey’s elections, after years of draining foreign reserves and taking other costly measures.
While the Wall Street Bank does not assume a baseline scenario, it believes that problems could arise if savers and businesses fear that a shift to more orthodox economic policies under a new government would lead to short-term foreign exchange market turbulence.
“The current market uncertainty poses significant risks in our view,” Goldman said in a research note published Wednesday.
Authorities could offer currency swaps to local banks and try to reassure those who have deposited their money in the devaluation-protected bank accounts introduced in 2021 to stop the lira’s plunge this year, but those measures may not work.
“Given the short-term nature of the instruments, time is unlikely to be on the authorities’ side,” Goldman’s analysts said. “Hence, we believe there will need to be interim solutions”.
If the problems were to prevail, the lira would fall, especially since Turkey’s currency reserves have shrunk sharply in recent years.
Goldman estimates that after last month’s devastating earthquake, Turkey’s reserves now stand at just $42 billion, if illiquid assets such as gold, bilateral swap lines, and IMF special drawing rights are removed from the equation.
This compares with a combined foreign exchange short position – or exposure – of the central bank and the Treasury of $260 billion. This has increased by $206 billion since mid-2018, mainly due to currency-hedged deposits and swaps with domestic banks.
“There are significant liquidity risks if these two markets get out of balance,” Goldman said, but added that a return to more orthodox economic policies would likely be beneficial for Turkey in the long run.