Economy in Turkey: New peak in USD/TRY exchange rate
The USD/TRY exchange rate starts the new week at a new peak of 27.20, with the effects of the Central Bank’s decision to limit foreign exchange-indexed deposits announced the previous night expected to be seen in the market.
While the USD/TRY rate had risen sharply above the 27 level following the elections, it has been moving relatively flat above that level. The effects of the Central Bank of Turkey’s (CBRT) first significant step aimed at reducing the foreign exchange-indexed deposits (FXID) will be observed in the markets.
NEW REGULATION COULD LEAD TO INCREASE IN INTEREST RATES ON TL DEPOSITS
Bankers are estimating that today’s regulations could lead to an increase in interest rates on Turkish lira deposits and a decrease in FXID by over 15% until the end of the year.
The CBRT took its first overt step to reduce the FXID, which had been criticized due to its high cost to the public in the transition from government-controlled foreign exchange policies to liberal policies during the transition period.
TARGET IS TO INCREASE SHARE OF TL ACCOUNTS WITHOUT RATE PROTECTION
In the CBRT’s announcement, it was decided to transition from accounts supported with exchange rate protection to Turkish lira accounts and to aim for a certain degree of renewal of exchange rate-protected accounts, as well as to increase the share of Turkish lira accounts without exchange rate protection.
Regulations also ended the practice of converting foreign currency deposits to foreign exchange-indexed deposits and the implementation of securities and reserve requirements based on the share of Turkish lira.
15% DECREASE TARGET FOR FXID
An expert said, “In conclusion, the initial goal of the regulations seems to be the reduction of FXID accounts, which constitute around 26% of the sector’s total deposits and have led to significant losses for the CBRT, by achieving rapid growth. As of now, assuming that the total FXID size, which is 3.357 trillion Turkish liras, consists of about 20% in Turkish lira and the remaining 80% in foreign currency, the transformation targets of 95% and 5% set for these subgroups imply that the total FXID size is aimed to be reduced by at least around 15% by the end of the year.”
Bankers will be monitoring the “new ceiling” rate to be announced by the CBRT, especially for commercial and credit interest rates, to assess its impact on interest margins.
All these regulations and the process of reducing FXID could have a reducing effect on the CBRT’s reserves. Bankers are of the opinion that one of the steps taken by the CBRT over the weekend, an increase in foreign currency reserve requirements, is aimed at mitigating this loss of reserves.
