Turkish lira nears all-time low as foreign exchange reserves fall
With no Fed swap line and depleting FX reserves, analysts say Turkey is running short on ammunition to defend the lira.
Turkish Finance Minister Berat Albayrak told investors on Wednesday that the country’s foreign exchange reserves remained more than adequate and dismissed suggestions that authorities could impose capital controls, according to multiple people on a conference call.
Despite the message of reassurance, the lira was down more than 1.5 percent shortly after the call, continuing its slide towards the record low of 7.24 per dollar hit during the country’s last major bout of currency turmoil back in August 2018.
The government’s dollar-denominated bonds fell too, extending their steepest falls in over three weeks with some down as much as 1.8 cents, by the time the call had ended.
Turkey’s lira tumbled 1.3 percent on Wednesday, nearing crisis levels after a regulator clamped down further on foreign access to local markets, exacerbating investors’ concerns over the country’s depleted foreign exchange reserves.
The central bank’s net foreign exchange reserves have fallen sharply to nearly $25bn from $40bn this year. Analysts say that is largely due to its funding of state bank interventions to stabilise the lira, which has nonetheless fallen 17 percent so far this year.
Compounding worries, Turkey faces a relatively high $170bn in external debt costs this year.
“They are trying to achieve too many things at once – keep rates low and the currency stable, and they don’t have the reserves,” Peter Kisler, emerging markets (EM) portfolio manager at North Asset Management, said before the call.
“The one thing that is stopping me from being more bearish is the possibility of still getting a swap line from the Federal Reserve,” he said.
To address the cash crunch, Turkish authorities have reached out to the United States central bank, the Federal Reserve, and other central banks to seek a possible currency swap facility, though no deal has been announced.
Any Fed facility would be conditional on dollar needs, counterparty risk and monetary independence, which analysts have questioned in Turkey.
Swap lines – in which the Fed accepts other currencies in exchange for dollars – are meant to support big foreign dollar markets and not serve as a credit facility. The Fed did not include Turkey when it expanded them to some emerging markets in March.
Albayrak told the call that Turkey has never deviated from free-market practises, and any future policy measures will abide by this principle, the sources who had listened to the call, which was not open to media, said.
Albayrak said during the call on Wednesday that he was optimistic about sealing a deal for a swap line for foreign exchange (FX) funding, though he gave few details, the sources added.
“The answers [from Albayrak] were what you would expect from him,” said one of the investors on the call.
“Banks can weather the crisis, they consider non-resident deposits as a stable … and he wouldn’t commit to levels on reserves or the currency.”
The Turkish Ministry of Treasury and Finance was not immediately available to comment.
Turkey is starting to slowly ease some measures taken to curb the coronavirus pandemic, which are pushing its economy into an expected second recession in less than two years.
The last downturn was sparked by a currency crisis that in August of 2018 sent the lira to its weakest level yet.
Late on Tuesday, the BDDK banking watchdog limited lira transactions between Turkish banks and foreign firms to 0.5 percent of the local lenders’ legal capital, from 1 percent. Last month, it cut the limit to 1 percent from 10 percent.
The watchdog said the moves are meant to ensure local financing needs are met amid a slowdown due to the pandemic, but some said it was a sign that options are running out.
“The market knows that the central bank has few reserves and no swap line with the Fed, which means they have very little ammunition to defend the lira,” said Antje Praefcke, FX and EM analyst at Commerzbank in Frankfurt. “We might be approaching the point of no return.”
Albayrak has said the central bank’s reserves were adequate to meet short-term needs and highlighted its gross reserves, which stood at $53bn.
But markets reflected growing risks, including a jump to multi-week highs in both the cost of insuring exposure to Turkey’s sovereign debt and in volatility gauges.
Turkey “needs a new forex injection”, said a local bank treasury official who requested anonymity. “The lira is heading towards an extremely low value. Any steps that reduce convertibility will be negative in the medium term if they are lasting beyond their short-term effects.”