Turkey’s total reserves up at record $140 billion: Bankers

The Turkish Central Bank’s total reserves have jumped to a record level exceeding $140 billion, five bankers’ calculations showed on Tuesday, sustaining an uptrend after it adopted more orthodox policies following May elections.

The rising reserves, alongside 3,150 basis points in interest rate hikes since June, have marked a departure from years of unorthodox and at times erratic policymaking - and some foreign investors are taking note.

Including the latest rise of $3.5-3.8 billion in the week to Dec.1, total reserves have surged $41.5 billion since June, when President Tayyip Erdogan appointed former Wall Street banker Hafize Gaye Erkan as central bank governor.

Ankara has also abandoned a practice of using reserves to directly support the lira currency, and sought to unwind heavy-handed financial market regulations to bolster the policy U-turn.

The central bank did not comment on the reserves figures. Official data will be released on Thursday.

The five bankers provided Reuters with figures based on central bank balance sheet calculations.

Those calculations showed that net forex (FX) reserves were estimated to have fallen $1 billion last week to $35 billion, after having surged more than $40 billion since June.

On June 2, just after Erdogan won re-election, the central bank’s net reserves were minus $5.7 billion, their lowest since data publication began in 2002.

Years of rate cuts, soaring inflation and depleted FX reserves sparked an exodus of foreign investors from the major emerging market economy. But the recent U-turn has brought renewed interest.

Amundi, Europe’s largest asset manager, told Reuters it had started dipping its toe back into the Turkish lira, while central bank officials said funds are also beginning to arrive from large U.S.-based institutional investors.

Hakan Kara, a former central bank chief economist who is at Bilkent University, said the bank’s apparent net purchase of $5.6 billion in the last two weeks suggests that “capital inflows accelerated...probably due to foreign swap entries.”

Still, foreigners hold less than 1% of lira denominated bonds, down from 10% in 2019 and 20% in 2015, official data shows. Investors worry that Erdogan could again fire his central bank chief and Treasury minister and return to unorthodox policies.

Yet some large banks, including Deutsche Bank and JPMorgan, are recommending that clients reconsider Turkish assets, with the former saying lira-denominated instruments may be one of the best trades among emerging markets in 2024.

Turkey’s credit default swaps (CDS), which rose to 700 basis points at mid year, were down to 337 on Monday, data from S&P Global Market Intelligence showed.

The Treasury sold two-year benchmark bonds at a compound yield of 40.51% on Monday, up more than 30 points from the single-digit levels to which they had fallen at the time of the elections due to regulations requiring banks to buy bonds.

Bankers said the latest auctions attracted foreign demand.

The Treasury will sell a four-year TLREF-indexed bond and 10-year benchmark on Tuesday. It only plans 45 billion lira in domestic borrowing in December, but borrowing will speed up in January and February to total 388 billion lira ($13.3 billion).

Meanwhile Turkey’s annual inflation rate ticked up slightly in November, the state statistics agency said Monday, showing further signs of levelling off following a series of sharp interest rate hikes. The rate moved to 61.98 per cent last month from 61.36 per cent in October, the TUIK state statistics agency said.

The pace at which consumer prices are rising has started to ease after six successive months of interest rate hikes took borrowing cost to 40 per cent from 8.5 per cent.

Analysts are pencilling in a final rate hike of 2.5 percentage points at the central bank’s next policy meeting on December 21.

They expect the policy rate to stay steady for the first of next year.

The latest batch of data show higher borrowing costs starting to slow down consumption -- a key goal of the central bank.

Turkey’s gross domestic product rose by just 0.3 per cent between July and September. It had risen by 3.3 between April and June.

Signs of Turkey’s economy starting to emerge from crisis are starting to be noticed by foreign investors who had pulled out of the market because of President Recep Tayyip Erdogan’s unpredictable past policies.

Analysts blame Erdogan for setting off the inflation spiral by forcing the nominally independent central bank to slash borrowing costs far below the rate at which prices were rising.

Reuters