Tim Ash:  A hugely dangerous monetary and exchange rate strategy

Turkish President Recep Tayyip Erdogan said authorities used $165 billion of central bank foreign-currency reserves to weather developments in 2019 and 2020, and may use them “again when needed.”  He was responding to a fierce media campaign by the opposition questioning why and how Turkish Central Bank sold $128 bn of FX reserves through state lenders during former economy czar Berat Albayrak’s reign. The campaign caught the attention of Turkish public, even that of AKP voters, so much so that campaign banners have been forcibly removed by police, with several campaigners being on trial for insulting Erdogan. A series of explanations by AKP heavy weights, Economy minister Mr. Lutfi Elvan and CB governor Mr Sahap Kavcioglu failed to quash the uproar, because each contradicted the previous.


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“The central bank currently has around $90 billion in reserves,” he told lawmakers in Ankara on Wednesday. “These reserves may be used again when needed or they may rise above $100 billion” in the future, Erdogan said, referring to the monetary authority’s total gross reserves.


Claims voiced by the main opposition party that the Central Bank reserves were traded in an illegal way to protect the value of the national currency are not accurate, President Recep Tayyip Erdogan has said, stressing that developments in the global economy in 2019 and 2020 forced the Central Bank to make significant foreign exchange transactions.


He said that the reserves were used in meeting the demand of all parties for transactions that require foreign currency, from importers to investors, the real sector to the public.


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“For a long time, our Central Bank hasn’t been making these transactions through auctions, but through the market-maker banks working on a 24-hour basis to avoid midnight operations towards our country in Asian markets.”


If the Turkish Central Bank had not met the demand for foreign exchange without hesitation, the situation would be far worse, Erdogan said, citing Turkey’s economic crises of 1994 and 2001, he added.



BlueBay strategist Tim Ash commented on President Erdogan’s “clarifications” in his personal capacity:


Not very reassuring from Erdogan.


This suggests it is going back to Lebanon policy settings where FX reserves are used to defend the exchange rate, utilising the FX deposit base of locals, and the result is net reserves go heavily negative – likely higher than $60bn currently in negative territory.


And this is all because Erdogan has an aversion to higher rates, the standard defence against pressure on the exchange rate.


I don’t think the $128bn was stolen, but it was used in a disastrous defence of the exchange rate as a vanity project to defend Erdogan’s own strange views on monetary policy and interest rates in particular.


Gross FX reserves might be $90bn, but with net of negative $60bn the challenge comes when the population realises that the CBRT has tapped their FX reserves to defend the exchange rate.


This is a hugely dangerous monetary and exchange rate strategy. It rarely ends well when central bank run large negative net international reserve positions. Lebanon is a case in point.


Hurriyet Daily News, Bloomberg, Reuters, ParaAnaliz



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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 www.paraanaliz.com and has contributed to the financial daily Referans and the liberal daily Radikal.