Turkey’s central bank has returned a $5 billion deposit to Saudi Arabia, signaling Turkey’s confidence in its ability to restore foreign exchange reserves without borrowing.
The Central Bank said in a statement that external liabilities have recently improved by about $7 billion through a reduction in deposit balances.
A sharp improvement in investor sentiment since Turkey’s economic team overhauled its economy last year has led to strong demand for Turkish assets, stabilised the lira and prompted Deutsche Bank to say buying lira bonds is the best trade of the year in emerging markets.
This shift allowed the central bank to reduce its foreign exchange liabilities at a record pace.
It is noteworthy that the Saudi Fund for Development deposited $5 billion with the Central Bank of Turkey last year.
Since the March 31 local elections, local investors have withdrawn $11.5 billion from government-backed accounts that promised to compensate investors for losses in foreign currency, while foreign portfolio inflows into Turkish stocks and government debt have reached $18 billion.
trust signal
Bloomberg quoted Tim Ash, emerging markets strategist at RBC BlueBay Asset Management, as saying that the Turkish central bank’s move is a “sign of confidence,” adding: “Turkey is moving into a much better position with positive net reserves now.”
Bloomberg Economics estimates that the central bank added about $80 billion to its reserves in the second quarter alone, and as of early July, net reserves, excluding swaps with commercial banks, stood at about $15 billion, up from about minus $60 billion before local elections in March.
“We have largely eliminated swaps with domestic banks and are now reviewing deposit agreements with our international counterparts,” central bank governor Fatih Karahan told Bloomberg in an interview this month.
carry trade
However, a potential unwinding of carry trades (interest trades) or renewed domestic interest in foreign currencies could pose challenges for the monetary authority.
Carry trading refers to the practice of borrowing in places where interest rates are relatively low, and then converting that money into instruments in currencies that offer higher interest rates, such as the Turkish lira. The attractiveness of this strategy depends on the level of interest rates and the stability of the currency.
The central bank, which set its benchmark interest rate at 50%, has pledged to maintain a tight monetary policy to curb inflation and maintain the attractiveness of lira assets.
About $20 billion of the increase in foreign reserves could be linked to carry trade flows, Bloomberg Economics estimates.
