Reserve Depletion Not A Sustainable Strategy

Central Bank of Turkey (CBRT) governor Erdem Basci announced at a press conference on December 24 that he would sell a minimum of US$3.0bn in reserves through the remainder of 2013, on top of the US$1.0bn sold from December 17 - December 23 and approximately US$15bn since June, in what appears to be an attempt to take advantage of low trading volumes to reverse the recent decline of the Turkish lira. Although this could prove successful over the very short term, we view this as an extremely risky strategy that is likely to backfire, as the CBRT's reserve arsenal will fall to precariously low levels by end-2013 and is inadequate to successfully take on the market.

Although the CBRT's level of gross international reserves stood at US$136.0bn on December 13, this figure is inflated by the inclusion of private bank's FX reserves held at the central bank, which as of December 20 stood at TRY169.1bn (US$80.6bn at the current spot rate). With this portion of gross reserves not available to the CBRT for its use in defending the lira via FX auctions, the CBRT's strategy will bring import cover to just over two months by end-2013, a precariously low level given Turkey's massive current account deficit.

Furthermore, Basci committed to US$3.0bn in FX auctions in January 2014 alone, implying that the CBRT could deplete upwards of 11% of its reserve arsenal in the next five weeks. With Basci's credibility already suffering from a perceived pro-growth bias that has damaged his inflation fighting credentials, anything short of a rate hike is unlikely to sooth investors or lead to a sustained boost in demand for Turkish assets in the context of accelerating US growth and heightening domestic political risk ( see 'Major Implications Of AKP Rift' December 19). As such, we caution that this strategy could actually intensify selling pressure on the Turkish lira once trading volumes pick up, and view any gains in the next week as temporary.

FX Auction Announcement Provides Temporary Relief
TRY/US$ Spot Rate

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This article is tagged to:
Sector: Country Risk
Geography: Turkey

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