Exclusively by Omer Faruk Bingol – Turkey’s economy is showing clear signs of stabilization thanks to rational policies and the normalization process. Recent developments in the Turkish lira and foreign currency deposits, interest rates and exchange rates are contributing to macroeconomic balance.
The country’s risk premium is below 260, with the dollar starting at ₺32.24 on March 31 and hovering around ₺32.00 for the past two months.
Deposit interest rates fall
In an effort to make the Turkish lira more attractive and effectively combat inflation, deposit rates, including those on foreign exchange protected deposit accounts (KKM accounts), jumped to an average of 68.88% for the 1-3 month period in the week of April 19. However, they fell to 61.77% last week, according to the latest data from the Central Bank of the Republic of Turkey (CBRT). Nevertheless, the exchange rate remained stable and the dollar did not fall below ₺30.00 due to the CBRT’s intervention.
Decrease in foreign currency accounts
Domestic and foreign currency account balances have declined significantly, peaking at $185.83 billion in the week ending March 22, prior to the local elections. By the week ending May 24, they had fallen to $170.6 billion, a decline of $15 billion in nine weeks.
A similar trend is seen in KKM accounts, which stood at RM2.576 trillion at the start of the year but fell to RM2.161 trillion last week, a decline of RM127 billion over the past nine weeks.
Without swaps, net reserves are positive
Foreign investors’ interest in Turkish lira-denominated financial products, especially Turkish government bonds, has led to a surge in foreign currency inflows. Foreign bond holdings hit a seven-year high of $9.85 billion last week and are expected to surpass $10 billion this week.
Since April 1, inflows of short-term currency, known as the “carry trade,” have reached about $16 billion.
Reductions in domestic and foreign currency accounts and large foreign inflows helped the CBRT’s net reserves excluding swaps turn positive for the first time in four and a half years. Including approximately $9 billion in Treasury currency holdings, the CBRT’s net reserves excluding swaps increased to $900 million.
Normalization achieved
The Turkish Central Bank’s policy interest rate is 50%, and the Turkish Lira overnight interest rate is 52.21%. Due to base effects, the Consumer Price Index (CPI) is expected to fall by about 20 percentage points in June and July, bringing the policy interest rate and the inflation rate roughly in line.
But a side effect of the stabilizing exchange rate is a widening trade deficit, which rose to $9.86 billion in April, the highest in nine months.
Consumer goods accounted for 15 percent of the country’s $113 billion in imports in the first four months of the year, a trend being closely monitored by economic officials.
