Investors outside Turkey should pay attention to the recent rise in its currency to a very low against the US dollar, as the country burns through its foreign exchange reserves, analysts said.
One US dollar raised as much as 7.37 lira USDTRY,
earlier Friday, according to FactSet, a record low for the Turkish currency against the greenback. The lira has been trading close to 7.20 to the dollar since its recent low tide. The dollar is up more than 21% against the currency in the year to date.
The lira slide comes despite the country spending billions in an attempt to raise the currency amid fears that weakness would stifle inflationary pressures. The country’s central bank has refrained from raising interest rates to defend the currency. Turkish President Recep Tayyip Erdogan has been sharply critical of high interest rates, surprising economists by insisting that high rates stimulate inflation.
This week, authorities revealed a policy change, and some of the lira restrictions imposed in June and July allowed foreign banks to re-apply for lira swaps, Oxford Economics economists wrote. The movements came after overnight lira lending rates fell short this week to 1000% in a sign of market trampling. The analysts noted that the central bank is also moving to roll back liquidity support measures.
“While these are welcome signs that the authorities are now more likely to tolerate [lira] volatility, they are not a valid substitute for the stricter monetary policy needed to restore confidence, ”they said.
Meanwhile, the country’s foreign exchange reserves have been significantly depleted. Turkey’s ratio at the end of July was 2.8 months (based on $ 46.7 billion in gross international reserves excluding gold), below the three-month rule for minimum reserve adequacy, Phoenix Kalen, an analyst at Société Générale, wrote in in Friday remark.
Authorities were able to maintain some stability by borrowing hard currency from the large pool of foreign currency deposits in domestic banks, analysts at Pavilion Global Markets noted. And with inflation falling from more than 25% last October to around 11.75% – a move partly due to the large drop in oil prices, Turkish residents have been comfortable “lending” their deposits to the central bank , seine se.
But that could change if a rapid drop in the currency could stifle further inflation, analysts noted, risking a bank run if economic conditions continue and confidence in the central bank’s ability to recover the borrowed currency takes a hit .
“Turkey’s lenders should pay attention,” they said, noting that the country’s banks and businesses will have to roll over $ 100 billion in debt over the next 12 months, with net external liabilities amounting to about $ 76 billion and accompanied by ” significant faluta-faluta “among lenders.
As an example, they note that, according to data from the Bank for International Settlements, Turkish banks have $ 29 billion in dollar-denominated liabilities versus just $ 18 billion in assets. They also have a deficit of more than $ 4.6 billion between euro-denominated assets and liabilities. It is worse for the online banking sector, where lenders have € 19 billion in liabilities and just € 3.6 billion in assets.
“The risk is that large-cap currencies, coupled with a ballooning current account deficit and weaker currencies, will limit companies’ ability to pay off their FX debt,” the analysts wrote. “Spanish, Italian and French banks have the largest claims on Turkish banks and subsidiaries. Not too outdated, UK banks have issued more than $ 18 billion in loan guarantees. ”
Elsewhere, analysts note that Turkey’s weight in emerging market indices has decreased significantly, standing at just 0.35% of the MSCI Emerging Markets Index 891800,
which is followed by the popular EEM ETF EEM,
against around 1.05% in January 2018.
“On the face of it, this suggests that the direct impact of a selloff in Turkish assets on the broader EM equity complex should be limited. “Even when Turkish equities weighed 1% on the index, the correlation coefficient went up to 0.8,” they noted.
But they are raising their concerns more about emerging market indices for local currency, where Turkey carries a 4.4% weight.
“Problems in one mismanaged EM normally earn weak points in others, and South Africa fits the bill,” they said, noting a 19% drop in foreign holdings of South African bonds up to a year ago in addition to a drop in ‘ e rand USDZAR,
This perhaps explains the fear of foreign investors about dipping their toes into emerging market bonds, they said, and advises investors to look at correlations with Brazilian bonds, as they carry the heaviest weight in EM bond indices and are used as a proxy for the broader EM complex.
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