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The central bank eases the swap transactions- yet the damage is done!

28 March 2019

In a mind blowing chain of events, Turkey’s central bank along with a number of banks have tried to cap the Lira’s fall through an “operation” in the swap market.  The equities market and the Turkish Treasuries were the victims of the efforts to keep the Lira stable ahead of the this Sunday’s critical local polls amidst heavy selling from foreign investors who are now practically locked in the Turkish markets.

Yet, the hardest hit from such a miscalculated choice from the government ranks which must have dictated the central bank for carrying out such an “operation” was on the FX starved Turkish economy.  In the short to medium term, the damage will get tangible as the “once beaten, twice shy” foreign investors will hesitate in taking the “Turkey risk” that did not even exist during the past 40 years when the capital flows were freed by then the government of Turkey.  Such a renewed risk sadly coincides with the period when the Turkish corporates and the banking sector are obliged to pay USD 177bn over the next 12 months as part of their external debt obligations.

In other words, what the AKP government had chosen to to since last Friday (March 22, 2019) for the sake of staying “strong” at this Sunday’s polls, with the Turkish citizens regarding lira’s value as an economic crisis barometer, was to risk the remaining “everything”  just for a face lift on Lira for about a week’s time.

With the international and the remaining free media in Turkey trumpeting what was happening- that is the cost of keeping the Lira stable ahead of the March 31 polls, the focus of the international financial community is once again on Turkey’s pressuring economic maladies and the AKP government’s controversial management choices to keep the game rolling; at least in the very very short term.

As of today, the central bank of Turkey stepped back partly from the so called swap scheme, and the swap transaction limit has been increased to 30% from 20%. The CBRT sent a letter to the banks and stated that “the total amount of swap sales transactions in the Turkish Lira exchange rate that has not been matured is limited by 30% of the total foreign exchange and effective transaction limits”.  Thus, the TL swap rate dropped to 350% and then to 80% from 1200% levels per night and the dollar has risen by 5% against the lira.  Yet, by the time the central bank stepped back, talks of contagion from the Turkish lira to other emerging markets like Brazil and South Africa also paved in.

Each time the Lira weakens, the Turkish government interprets it as a plot of the dark foreign forces against the Turkish economy, an attack beyond the speculative nature of the financial markets.  Viewing the Turkish macro economic figures as “very strong and healthy” the AKP government blames the “others” for trying to bring down the Turkish government.  Thus comes the “measures” that at times can contradict with free market principals to respond to or to get protected from such “unfair” attacks.  This time around, the measures are hinted to be “temporary” to get expired after Sunday’s local elections.  Yet, the spillover effects of such misfortunate choices will last longer.

In fact, President Erdogan addressing from TV channels today just reminded how he regards the swap operation rightly and timely.  As he repeated his own personal theory of high interest rates causing high inflation; he reiterated his belief that while the inflation rate began coming down, the remaining issue to tackle was pulling down the rate of interest in the coming months.   With such bad timing- yet again- when the Lira’s value is expected to slide when the “measures” are reversed, the President with his strong hold on the central bank began talking about policy rate cuts; again. President Erdogan accused the US and the Western countries for trying to pressures Turkey, that Turkey had fenced the attacks out and that while the speculators were unable to find Lira, dollar was losing ground and the lira was strengthening. The President also added that being an economist himself, he needed to tame the speculators in the market.

With the JP Morgan’s routine economy report which has given a market call to short Lira now under investigation, some lenders that attempted to short the lira last week—including Citibank, JPMorgan Chase and Deutsche Bank—failed to close their short positions and might be temporarily or even permanently banned from the payments system as per the circulating news in the papers close to the government.

All these and what has been happening during the daily course of economy management combine to spell trouble for the Turkish economy.  The monster that Erdogan-Albayrak duo created for the sake of “not losing major Turkish cities” like Ankara or even Istanbul in the weekend’s polls might as well soon have the muscle to create a severe volatility in all the asset classes. Once the Lira market starts functioning normally,  it would be hard to determine how far the Lira is set to get hurt; with its renewed repercussions on the inflation and the real sector fronts.

It is no surprise that the Turkish citizens have added another USD 2,5 bn to their fx deposit accounts last week to bring the total to a record high of USD 179 bn.









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