With no Fed swap line and depleting FX reserves, analysts say Turkey is running short on ammunition to defend the lira, Reuters
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.