Turkey has announced a return to a contentious policy of intervening in the currency markets in an attempt to steady the tumbling lira, despite a previous commitment not to do so and limited foreign exchange reserves.
The country’s central bank said on Wednesday that “unhealthy price formations” had prompted the decision to sell hard currency such as US dollars in an effort to support the lira.
President Recep Tayyip Erdogan backed the move, telling reporters that the central bank’s statutes had a provision that permitted currency intervention. “If they need to intervene in that way, they do it,” he said.
The move comes after the lira tumbled to a record low of TL13.87 against the US dollar earlier on Wednesday, a decline of 46 per cent compared with where it started 2021. The announcement sparked a strong rally, with the currency strengthening to around TL12.5 in London dealings — later trimming some of its gains to sit at TL13.2 to the dollar.
Turkey has not announced a direct currency intervention since it sold $3.2bn at the beginning of 2014. However, the country burnt through tens of billions of dollars of its foreign currency reserves in 2019 and 2020 in an unofficial intervention that attempted to bolster lira through a complex arrangement with state banks.
That policy, spearheaded by Erdogan’s son-in-law minister Berat Albayrak during his time as finance minister, was highly contentious. Opposition parties popularised the slogan: “Where is the $128bn?” — a reference to one estimate of how much money was spent on the ultimately futile intervention.
The scheme was halted in November 2020 when Erdogan brought Naci Agbal, a respected former bureaucrat, to the helm of the central bank and Albayrak resigned. Agbal was fired less than four months after his appointment.
Wednesday’s intervention was of limited size of between $300m and $500m, according to two sources in the financial industry.
“The volume of intervention doesn’t seem to be very big, which makes sense given that their net reserve position is somewhere between very poor and negative depending on the exact definition,” said Paul McNamara, of asset manager GAM.
“This intervention on its own isn’t going to work,” he added. “The market will keep pushing back until they see [the central bank] steps in again. If they make it clear they are willing to intervene repeatedly and drain their reserves, it can work for a while. But it’s not a sustainable position.”
The country’s international reserves fell to a 20-year low last year as the multibillion-dollar currency intervention took its toll.
The central bank’s foreign currency war chest had recovered significantly this year, with gross reserves in particular showing an improvement thanks in part to swap agreements with other central banks and a one-off allocation from the IMF.
But net reserves — which offer an indication of the bank’s firepower to defend the currency — remain deeply negative once borrowed money is stripped out. The country’s net reserves, excluding funds exchanged through swaps with Turkish commercial banks and other central banks, are estimated at minus $46.8bn, according to Goldman Sachs. Gross reserves were $128.4bn in the week to November 19, the Wall Street bank said.
Central bank governor Sahap Kavcioglu said in October that the bank did not plan to return to currency interventions, which had drawn strident criticism from international investors.
But the lira has plunged through a succession of record lows as the bank has repeatedly cut interest rates despite inflation of almost 20 per cent. President Erdogan has signalled that more rate cuts will follow.