Turkey’s central bank is moving in full force to defend the lira ahead of the runoff presidential election in less than two weeks.
A relentless stream of new regulations aims to deter demand for dollars following a weekend ballot that gave President Recep Tayyip Erdogan surprise momentum going into the second and decisive round of voting.
On Wednesday, the central bank reduced local lenders’ daily limits for purchasing foreign exchange on the interbank market, according to people with knowledge of the matter, as part of an effort to ease strain on the Turkish currency.
Banks were also asked to direct corporate demand for hard currency to the non-deliverable forwards market unless they have immediate needs, the people said, asking not to be named because the deliberations are private.
The central bank declined to comment.
Turkish authorities accelerating their efforts to keep the lira stable to ensure public confidence in a currency seen as a barometer of the country’s economic health.
Read more: Erdogan Vote Momentum Pushes Traders to Delay Bets on Lira Slide
Expectations for a depreciation in the coming months — regardless of the outcome at the ballot box on May 28 — are adding to demand for dollars at a time when Erdogan’s policy of ultra-low interest rates has already left Turkish assets fragile.
“On the FX side, one should not expect anything new from the central bank until the runoff,” said Cagri Kutman, Turkish markets specialist at London-based KNG Securities LLP. “That means access to FX will be limited and more expensive than the interbank market for retail investors. We already started to see steps in that direction.”
Read more: Turkey Central Bank to Limit Gold, Cash Demand in Post-Vote Move
Coaxing people to let go of dollars is increasingly on the agenda. Another regulation on Wednesday introduced an additional target for banks to convert their customer funds from hard currency to liras.
Under its unorthodox policy framework, the central bank requires lenders to buy low-yielding government bonds if they don’t comply with steps. Those include an additional monthly 10% conversion target that’s been put in place for a period between May 26 and July 28.
Other measures this week include the imposition of limits on the use of credit cards for cash withdrawals and gold purchases.
Unorthodoxy for Longer
A victory by the incumbent will likely mean the continuation of erratic economic policies that contributed to a decline of over 80% in the lira’s value against the dollar since 2018, when Turkey transitioned to a new executive presidential system that gave Erdogan sweeping powers.
The lira has lost almost 1% against the dollar since Sunday’s first round of voting. The cost of insuring against a sovereign default over the next five years rose to almost 690 basis points on Wednesday, the highest since last November and an increase of 172 basis points from Friday.
Average yields on Turkey’s dollar bonds rose above 10% on Tuesday, the first time they’ve been in double digits since October, according to Bloomberg indexes.
The central bank’s changes will likely “push up lira deposit rates and push down lira government bond yields,” said Cagdas Dogan, research director of Istanbul-based Tera Yatirim.
(Updates with bond yields.)
Author: Kerim Karakaya, Asli Kandemir and Beril Akman
