(March 6): Türkiye has spent US$12 billion, equal to roughly 15% of its foreign-currency reserves, to keep the lira stable during a week of global market volatility triggered by the war in Iran.
The Turkish central bank tightened liquidity conditions before markets opened on Monday and, when trading began, lenders stepped in to sell dollars to deter volatility, according to traders familiar with the deals, who asked not to be identified due to the private nature of the transactions. The amount of dollar sales declined throughout the week with no such transactions observed on Thursday, they said.
As a result, the lira has stayed calm at a time when most other emerging-market currencies tumbled.
“For the time being, we think that’s a sustainable policy,” said Nick Eisinger, head of emerging-market sovereign strategy at JPMorgan Chase & Co’s asset-management division. “They have decent ammunition to be able to carry on doing that but this is obviously why the whole longevity around what’s going on with Iran is so important.”
Eisinger’s view is that if the heightened-risk environment lasts a week or two, then “by and large the dust should settle and we can probably get back to some degree of normality.” If not, prospects become “much harder for a lot of risk assets globally.”
The dollar sales have made the lira one of the best performing emerging-market currencies this week, with a 0.1% decline against the dollar. Turkish policymakers are managing a gradual depreciation of the lira, seeking to provide a degree of predictability for businesses and investors as domestic price growth moderates.
See also: Robust Asian reserve pile positioned to defend currency slide
‘Small exit door’
The Turkish central bank’s net foreign-currency reserves, excluding swaps lines it has with lenders, stood at US$78.4 billion last Friday. Combined with the monetary authority’s gold holdings, it has roughly US$200 billion in its coffers.
The central bank declined to comment on foreign-exchange policy.
See also: Emerging-market FX swings top developed peers after record lull
A member of the US-led Nato military alliance, Türkiye is vulnerable to the conflict in the Middle East due to its proximity to Iran and its dependence on energy imports. Crude oil prices have jumped 16% since the war started last Saturday.
Bill Campbell, a portfolio manager at DoubleLine Group LP, is underweight Turkish bonds, saying the market is vulnerable to geopolitical shocks “It might be a very small exit door if the sentiment turns,” he said.
This week’s interventions are smaller than last April, when the authorities ultimately spent over US$50 billion in reserves to stabilise the currency and the central bank raised rates to calm markets following the jailing of Istanbul Mayor Ekrem Imamoglu — President Recep Tayyip Erdogan’s most prominent political opponent.
“Turkish lira’s moves have so far been contained,” Goldman Sachs Group Inc analysts, led by Kamakshya Trivedi, wrote in a note on Wednesday. “The central bank has large enough reserves to continue” for now, but the stance would become “less sustainable” if the shocks continue, they added.
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