Reuters:  Turkey’s planned inflation-linked bonds could sap deposits

Some banks are concerned that Turkey’s deposit base could decline as investors, eager to protect savings from price rises, snap up the government’s expected inflation-protected bond issuance, officials and bankers say.


Given that inflation has soared to 70%, the bonds could pull considerable savings from lira and hard currency deposits and even sap the government’s own foreign exchange (FX) protected deposit scheme, hitting the overall deposit base, they said.


The trick for Turkey’s Treasury will be offering a return on the debt that is high enough to halt dollarization but not so high that it erodes deposits, the officials and bankers told Reuters.


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The government has not discussed its plan to issue inflation-protect bonds in detail. But market expectations are high after a currency crisis in December set off the inflationary spiral.


“Details of the inflation-indexed bonds are still being discussed,” primarily the extra return on the debt that is expected to have a one-year maturity, a source familiar with the matter said.


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If the return is 10 points above the annual consumer price index (CPI), there may be an exodus from the FX-protected deposit scheme (KKM), the source said.


“The rate needs to be appealing but not so much that it prompts an escape from FX protected deposits,” the person added, requesting anonymity.


Total deposits in the banking sector are 6.2 trillion lira ($388 billion) including 3.5 trillion lira worth of foreign currency deposits, regulator data shows. KKM deposits have risen to 820 billion lira since it was announced in December.


Under pressure from President Tayyip Erdogan, the central bank cut its policy rate by 500 basis points late last year, prompting the lira to lose 44% against the dollar in 2021.


The bank’s one-week repo policy rate is 14%, while lira deposit rates are hovering under 20%. Real rates are deeply negative at 56%, a red flag for investors and savers.


With the lira sliding and interest slowing in the KKM scheme – which is backed by the Treasury and central bank – the government is seeking new policies to keep savings in lira.


“Banks are waiting for the inflation indexed bond. It’s not clear if there will be an outflow from deposits, but because the details of this product are unknown it worries the market,” said Arda Tunca, economist at Eko Faktoring in Istanbul.


A senior banker said the sweet spot for the government would be convincing investors to use hard currency holdings to invest in the inflation-protected bonds. However, the banker said, “this interest will have a negative impact to the banking sector deposits”.


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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.