Turkey Central Bank Announces Foreign Exchange Market Intervention... Could Backfire

Lira Value Halved This Year... Goldman Sachs: "Net Foreign Exchange Reserves in Negative"

[Asia Economy Reporter Byunghee Park] On the 1st (local time), the Central Bank of Turkey officially declared that it would intervene in the foreign exchange market to defend the depreciation of the lira. However, since there is not much room in foreign exchange reserves, it is expected to be difficult to prevent the lira's depreciation and may even face backlash. As long as President Recep Tayyip Erdogan continues to undermine the independence of the central bank, the instability in Turkey's financial market is likely to persist.

The Central Bank of Turkey stated that the dollar-lira exchange rate is abnormal and that it will sell dollars from its foreign exchange reserves to protect the value of the lira.

This declaration of intervention in the foreign exchange market by the Central Bank of Turkey is the first official one in nearly eight years since early 2014. However, it is estimated that the bank unofficially intervened in the foreign exchange market in 2019 and last year as well. Turkey exhausted $3.2 billion of its foreign exchange reserves in early 2014 when it officially declared intervention, and also spent tens of billions of dollars of reserves in 2019 and 2020. Due to continuous intervention in the foreign exchange market, Turkey's foreign exchange reserves fell to their lowest level in 20 years last year.

Dollar to Lira Exchange Rate 5-Year Trend [Image Source= Bloomberg]

Before the central bank's announcement of intervention, the dollar-lira exchange rate reached 13.87 lira per dollar, marking an all-time low for the lira. After the central bank's announcement, the lira surged, and the dollar-lira exchange rate briefly traded at 12.5 lira per dollar. However, it soon slipped back to around 13 lira per dollar, indicating that the central bank's market intervention had little effect.

The market estimates that the central bank supplied about $300 to $500 million in dollar liquidity.

Paul Nanamara, a manager at asset management firm GAM, said, "The scale of the intervention is not very large," adding, "Considering the size of the foreign exchange reserves, it seems like a reasonable choice."

According to Goldman Sachs, as of mid-last month, the Central Bank of Turkey's foreign exchange reserves stood at approximately $128.4 billion. The central bank has increased its foreign exchange reserves considerably this year through swap agreements with several foreign central banks and allocations of International Monetary Fund (IMF) Special Drawing Rights (SDR). However, Goldman Sachs estimates that the net foreign exchange reserves, excluding swap agreements with foreign central banks and local Turkish commercial banks, are negative $46.8 billion.

GAM's Nanamara also mentioned that the central bank's net foreign exchange reserves are very low or negative, predicting that the central bank will not be able to intervene freely in the foreign exchange market. He pointed out, "The market will wait until the central bank intervenes again. If the central bank shows willingness to continuously intervene by exhausting its foreign exchange reserves, there may be a temporary effect, but it will not last."

At the beginning of this year, the dollar-lira exchange rate was around 7.4 lira per dollar. Considering the current rate, the lira has lost nearly half its value this year. Five years ago, the dollar-lira exchange rate was about 3.5 lira per dollar.

The reason for the continuous depreciation of the lira is that President Erdogan does not guarantee the independence of the central bank's monetary policy and continuously demands interest rate cuts. In March this year, Erdogan dismissed former Central Bank Governor Naci Agbal just four months after his appointment, citing the interest rate hike. In July 2019, Erdogan also dismissed former Central Bank Governor Murat Cetinkaya for refusing to lower interest rates.

?ahap Kavcıo?lu, who was appointed after Agbal's dismissal, has been lowering the benchmark interest rate consecutively despite Turkey's inflation rate approaching 20%. Kavcıo?lu said as recently as last month that there were no plans to intervene in the foreign exchange market.

President Erdogan expressed support, saying, "The central bank maintains enough foreign exchange reserves to intervene in the market."

This content was produced with the assistance of AI translation services.