Attempts by Turkey’s regulators to prop up its weak currency before last weekend’s election will limit banks’ ability to lend, analysts warn.
Days before the election, the authorities cracked down on short selling by investors – selling lira they did not own in the expectation of buying it back at a profit after it had fallen on foreign currency markets – by preventing Turkish banks from lending lira to foreign borrowers.
The resulting currency crunch sent the cost of borrowing liras overnight on the offshore swap market soaring past 1,000% -- but also threatens to adversely impact on Turkish banks, which rely on the market to raise lira funding to finance lending at home.
“A less-liquid offshore swap market will translate into onshore lira tightness,” Goldman Sachs Group analysts Clemens Grafe and Murat Unur wrote his week. “Banks will need to raise their local-currency deposit rates and shrink their lira assets, tightening financial conditions domestically.”
It also appears that much of the more recent selling of the lira was triggered less by speculators on the international currency markets and more by ordinary Turkish families seeking to protect the value of their savings by buying dollars and euros.
Goldman’s analysts have already predicted that Turkey’s economy may shrink by -2.5% this year, further weakening president Recep Tayyip Erdogan’s hold on power. His ruling AK Party suffered several electoral setbacks, including the capital, Ankara, and also Istanbul, controlled by parties linked to Mr Erdogan since he became the city’s mayor 25 years ago.
The administration’s push to extend cheap loans to reactivate growth has already pressured deposit rates as lenders try to protect their profit margins, leading to an unprecedented swing to foreign-currency savings. The average rate on lira deposit accounts has dropped by more than 650 basis points from a 14-year high in September 2018 to 20.5%, just exceeding 19.6% annual inflation in March.
Turkish banks, which have ample foreign-exchange funding due to the high level of deposits in currencies other than the lira, have a net swap position of around 217 billion liras (US$39 billion) as of end February, according to the banking regulator’s data.
Higher lira deposit rates are inevitable to reverse the dollarisation of the economy as investors seek protection from inflation, Cagdas Dogan, a banking analyst at BGC Partners in Istanbul, told Bloomberg Turkish residents’ deposits in foreign currencies reached a record $179 billion in the week ending March 22, central bank data showed.
Investors fear that Mr Erdogan’s election setback will see him engage in short-term fixes in a bid to restore his popularity rather than embark on the reforms needed to improve the Turkish economy’s longer-term competitiveness.
While government debt is relatively low there are still high levels of debt in the private sector, particularly among Turkey’s banks, with loans to foreign creditors of almost $180 billion due for repayment this year.
Economists have been downgrading their growth forecasts in anticipation of Turkey moving deeper into recession. Last month, the Organisation for Economic Co-operation and Development (OECD) cut its forecast for the economy in 2019 to -1.8% from -1.4%..
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