Turkey’s central bank employs secondary tools to combat lira’s latest slump

By bne IntelliNews May 9, 2019

Turkey’s central bank, under pressure for an emergency rate hike with the Turkish lira back under severe pressure, on May 9 resorted to secondary tools to stabilise the currency by suspending repo auctions and taking additional liquidity steps. A combination of anxieties have hit investor sentiment on Turkey’s currency, but the decision taken this week to re-run the Istanbul mayoral election won by the opposition, seen as a death knell for democracy in the country in some quarters, has caused particularly bad jitters.

The regulator said it cut a forex maintenance facility within its reserve options mechanism (ROM) to 30% from 40% to assist financial stability. The move should provide $2.8bn of forex liquidity to the market, while Turkish lira (TRY) 7.2bn lira would be withdrawn, the national lender said.

Hours before that move the central bank announced it had frozen one-week repo auctions for a period of time. The consequence will be a gradual raising of the average cost of funding under the benchmark one-week repo rate of 24% to the overnight lending rate of 25.5%.

Additionally, the central bank pushed up its forex reserve requirement ratios by 100bp, which it said would result in $3bn of forex liquidity being withdrawn from the market.

The TRY fell by around 1% in morning trading on May 9 to 6.2460 against the dollar—its weakest level since September 24—but was trading in the 6.19s by the end of the day.

The TRY has lost 15% of its value against the dollar this year to date, having lost 28% in 2018.

Jason Tuvey, senior emerging markets economist at Capital Economics, was quoted by Reuters as saying the moves had not provided permanent support for the lira because investors believed they showed that President Recep Tayyip Erdogan was still influencing monetary policy.

“The central bank’s moves suggest it is under political pressure to not hike interest rates so it has to go through the backdoor in order to avoid the wrath of President Erdogan,” he said.

Investors are worried that the decision to repeat the Istanbul election, with a poll scheduled for June 23, will add nearly two months of uncertainty over Turkey’s plans to rebalance and stabilise its imperilled economy.

“Erdogan cannot really afford to lose again in Istanbul so he will do what is necessary to win the elections,” Guillaume Tresca, senior emerging markets strategist at Credit Agricole, was reported as saying. He added that the government is likely to favour credit growth and increase public spending to garner support.

The cost of insuring exposure to Turkey’s sovereign debt rose on May 9, with five-year credit default swaps jumping 11bp from the previous day’s close to 483bp. Similar levels were seen just before the March 31 local elections.

Turkey’s dollar bonds slumped across the curve, with the 2026 issue dropping 1.6 cents, Refinitiv data showed.

The yield on the 10-year benchmark bond rose to 21.35% in spot trade from 20.99% on May 8, while the two-year benchmark bond surged to 25.17 from 23.05.

The main BIST100 share index was down 1.77%, while the banking share index fell 2.22%.

The central bank’s net international reserves fell to $25.84bn in dollar terms as of May 3, data relayed by Reuters showed on May 9, while its gross forex reserves stood at $72.63bn. Analysts feel the regulator would not have the “ammo” to fight another huge slump in the lira.

Local investors have also lost confidence after last year’s currency crisis, which caused forex deposits and funds including precious metals of local individuals to rise steadily in the six months to April.

Forex holdings of local individuals and institutions fell to $179.18bn as of May 3, down 0.7% from the previous week, official data showed on May 9.

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