Turkish lira crowns historic week with big boost from Erdogan government

Turkish Lira banknotes are seen in this illustration taken in Istanbul, Turkey on November 23, 2021. REUTERS / Murad Sezer / Illustration

ANKARA, Dec.24 (Reuters) – The Turkish lira was on track for its strongest week on record on Friday, climbing more than 50% on the backing of billions of dollars in market interventions backed by the State and the promise that the government would cover currency losses on certain deposits.

The Turks did not sell dollars on Monday and Tuesday, according to official data suggesting they played little part in the biggest gains in the market. State interventions, meanwhile, cost the central bank more than $ 8 billion this week, according to traders’ calculations.

After four scorching days, the pound cooled 3% to 11.8 against the dollar at 1351 GMT.

The currency plunged to an all-time low of 18.4 per dollar on Monday, after falling for several months due to unorthodox interest rate cuts and fears of an inflationary spiral.

But on Monday evening, President Tayyip Erdogan unveiled a plan in which the Treasury and the central bank would repay losses on deposits converted into lira against foreign currencies, triggering the biggest intraday rally of all time.

The anti-dollarization plan prompted the Turks to convert some $ 900 million of hard currency into lira, according to Finance Minister Nureddin Nebati.

But data from banking watchdog BDDK showed that after a strong build-up of dollars last week, individual Turkish depositors held $ 163.7 billion in hard currency on Tuesday – virtually unchanged from Monday and Friday, when the total was $ 163.8 billion.

Instead, the lira was given a big boost by what traders and economists called dollar stealings by state banks, backed by the central bank.

In the first three days of the week alone, the central bank’s net foreign exchange reserves fell by $ 8.5 billion, according to calculations by three bankers who spoke to Reuters. The drop totaled nearly $ 18 billion in December, they said.

“We believe positioning and stealth intervention will continue to dominate price action,” said Win Thin at Brown Brothers Harriman. “Even if the pound stabilizes, there are still strong inflationary impulses in the economy that will continue to erode the value of everything in local currency.”

After Reuters announced progress in talks over possible currency exchange lines with Azerbaijan and the United Arab Emirates, Governor Sahap Kavcioglu said Turkey’s central bank could sign two currencies within two weeks.

“USE ALL INSTRUMENTS”

Citing four sources close to the operations, including a senior Turkish official, Reuters reported on Thursday that state banks had massively sold dollars earlier this week in the wake of Erdogan’s announcement.

State-owned banks have not commented on the matter.

The central bank, which was not immediately available for comment, had announced interventions in the dollar-selling market earlier this month, but not this week.

Nebati, discussing the interventions on broadcaster NTV on Thursday, said Turkey “is using all the tools at its disposal in a positive way.”

As of December 17, the central bank’s net foreign exchange reserves fell to $ 12.2 billion from $ 21.2 billion a week earlier, to levels last reached in May, reflecting the interventions.

Hakan Kara, former chief economist at Turkey’s central bank, said on Twitter that the bank’s currency sales stood at $ 17-20 billion this month, of which $ 3 billion on Wednesday alone, although that he said it was not clear how they were used.

“State banks have provided significant support to the forex balance, but it is not just state banks that sell dollars,” said one bank trader who spoke on condition of anonymity.

In 2019-2020, the central bank supported, via swaps, the sale of some $ 128 billion via state-owned banks to stabilize the lira, depleting Turkey’s foreign exchange reserves and drawing strong criticism from the lira. political opposition.

Under pressure from Erdogan, the central bank has cut its key rates by 500 basis points to 14% since September despite a jump above 21% in inflation. Price increases are expected to exceed 30% next year, in part due to the depreciation of the pound.

Reflecting these concerns, Turkish Airlines will increase the wages of its employees by the inflation rate plus 65% for 2022, according to an agreement with its union. Read more

Reporting by Nevzat Devranoglu and Jonathan Spicer; Editing by Jane Merriman and Catherine Evans

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