The rebound of Turkish Lira (TL) vs the American dollar (USD) proved “transitory”, despite allegations of more state bank FX sales to stabilize the currency market. Perhaps this is not surprising in a country, where the Economy Czar, Mr. Nurettin Nebati brags of “switching to a heterodox economic regime”, as if he doesn’t know “heterodox” doesn’t have any positive connotations in economics-finance literature. Ankara is also slowly and shyly moving into “soft currency controls”, as Bloomberg reports informal pressure had started on individuals who want to send FX funds abroad.
Turkey’s lira slipped as much as 1.7% on Thursday, and has shed some 22% in the last nine trading sessions, on persisting investor concerns about a surge in inflation to a 19-year high after a series of unorthodox interest rate cuts.
The currency weakened to 13.89 against the dollar, before trimming its losses to 13.745 by 0800 GMT. Last year it slumped 44% in its worst year since President Tayyip Erdogan’s AK Party came to power in 2002.
Simone Kaslowski, chairman of Turkey’s leading TUSIAD business association, said on Wednesday evening the leap in annual inflation to 36.1% clearly showed the need to reconsider the policy steps Turkey has taken, Reuters reported.
“If these are the right steps, why is inflation so high?” he was cited as telling an economic panel by news website T24.
Market interest rates were rising despite the central bank rate cuts and dollarization was continuing to increase, he said, questioning whether Turkey was “missing the big picture as we turn to short-term temporary solutions”.
Finance Minister Nurettin Nebati said on Wednesday the government would now prioritize the fight against inflation, but added that it had abandoned “orthodox policies” and was charting its own course.
Central Bank intervenes to relieve government bond market
Two analysts said the central bank purchased government debt on Wednesday for the first time in more than a year, buying 300 million lira of bonds maturing in 2027 and 2028 and bringing yields down from highs reached earlier this week.
Turkey’s benchmark 10-year bond yield fell to 22.63% on Wednesday from 23.11% a day earlier. In its yearly policy text last year, the central bank said it may resort to government bond purchases as a part of its open market operations.
Bloomberg: Turkey Tightens Oversight of Currency Market as Lira Weakens
Turkish authorities are keeping tabs on investors who are buying large amounts of foreign currency and asked banks to deter their clients from using the spot market for hedging-related trades as they struggle to contain the lira’s slide according to Bloomberg.
The central bank has requested commercial lenders inform them of any big-ticket dollar purchases that may impact the market negatively, according to people familiar with the matter, who asked not to be named as the information isn’t public.
These measures amount to informal or soft capital controls, the continuation of which could trigger a bank run by residents.
Despite daily steps to stabilize the exchange rate, TL tumbles lower vs USD each day, as some analysts claim deposit withdrawals from banks are becoming visible. There is almost no interest from resident to convert FX savings into exchange rate protected TL deposits, reports the press.
Two commentators appearing on dissident news channels claimed whenever OSD/TL approaches 14.00, Central Bank intervenes via state banks.
In theory, lates measures ought to stop the bleeding of the Lira, because most foreign investors are out of the Turkish markets, as current account deficit is projected to remain modest throughout 2022. On the other hand, domestic savers are now solely operating on the basis of rumors, which causes severe fragility in the financial system.
Coupled with a domestic agenda which reeks of blood and vengeance, a bank run or formal and stricter capitals controls can’t be ruled out.
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