By Jonathan Spicer
ISTANBUL (Reuters) – Turkey could implement a series of strategies to protect its lira from slipping after President Tayyip Erdogan abruptly replaced central bank governor – including swap limits currency, the intervention of state banks, and even capital controls.
Erdogan’s shocking decision to fire hawk Naci Agbal and replace him with Sahap Kavcioglu, a like-minded critic of high interest rates, sent the coin down by as much as 15%, to near a century low. record in volatile early trading on Monday.
While Finance Minister Lutfi Elvan said Turkey will follow free-market rules and free-floating currencies, analysts say the government is likely to return to a less mainstream game. system was used before Agbal raised the rate to protect the lira and reduce its foreign exchange reserves.
Many pointed out that costly market interventions took place under former finance minister Berat Albayrak, son-in-law of Erdogan, who resigned the day after Agbal was appointed in November.
State-owned banks have sold around $ 130 billion to stabilize the lira over the past two years, backed by central bank swaps. As a result, the central bank’s foreign currency fell by three-quarters last year to just $ 11 billion.
But if foreign exchange reserves fail to rise, and the lira continues to decline as investors expect a rate cut, the balance of payments crisis erupts – leaving some plausible options.
Current account deficits and steady cash outflow of foreign funds have affected Turkey’s heavily imported economy for years – although Agbal’s rate hikes have reversed this cash flow. in a few months.
Turkey’s external debt service obligations are close to $ 8 billion this month and will be slightly higher in June, central bank data show.
Goldman Sachs (NYSE 🙂 says a “quick correction” in the current account may be needed, as the market will be less and less able to finance the deficit. It predicts that currency interventions will restart due to pressure on the lira.
Citigroup (NYSE :), another Wall Street bank, says the default is likely to convince Turkish authorities to avoid unorthodox steps that could discourage investors further.
Phoenix Kalen, analyst at Societe Generale (OTC :), said: “We anticipate a return to the soft capital control regime that prevailed during Berat Albayrak’s tenure, as policymakers try to stabilize the exchange rate and the money market. “
Graphics: Lira’s Decline Timeline – https://fingfx.thomsonreuters.com/gfx/mkt/oakpelnjjvr/Lira%20Timeline%20Central%20Bank%20Governors.PNG
CAPITAL CONVERSION AND CONTROL LIMITATIONS
If the central bank’s policy rate quickly drops from the current 19%, as some investors have predicted, regulators could once again tighten their currency swap limits. Banks to stop the outflow and increase the cost of short selling lira.
The bank watchdog extended the limit to 10% of reserves in September, after cutting it to 1% in April.
A handful of analysts, including at the SEB, said Turkey would eventually be forced to adopt capital controls, including new tariffs on local currency earnings and restrictions. buy local currency.
Erdogan’s ruling AK Party deputy head Nurettin Canikli said on Monday that capital controls are an insurmountable “red line”.
The Turks’ foreign currency reserves hit a record of $ 236 billion in January, reflecting concerns about inflation of nearly 16% – compared with the central bank’s target of 5% – and discouragement. believe in the lira, which has halved in value in less than three years.
“Domestic savers are right again,” said Kerim Rota, a founding member and head of economic policy for Turkey’s Opposition Future Party, launched in 2019. .
“We think the new central bank governor will go back to the policies made by Albayrak before November 2020,” he said, adding that Turkey has come to a “fragile and zero point.” trustworthy in the eyes of foreign capitalists ”.