Turkey’s borrowing masks ‘significant’ decline in forex reserves

A surge in short-term borrowing masked a drop in Turkey’s net foreign currency reserves to just $1.5bn last month, according to new data that raise concerns about the country’s ability to defend its economy from the global financial shock caused by the coronavirus pandemic.

The Turkish central bank sharply increased its borrowing in February through short-term swap operations that it uses to exchange lira with local banks in return for dollars, according to data released on Friday. This brought the total outstanding amount of money borrowed through such operations to $25.9bn at the end of last month.

In comparison, net foreign assets — a measure of net reserves that is reached by subtracting foreign currency liabilities from assets — were $27.4bn. Once the short-term borrowing is deducted, that figure is just $1.5bn, which analysts say is insufficient to tackle any large declines in the lira.

Brad Setser, a senior fellow at the Washington-based Council on Foreign Relations, said last month’s decline in reserves was “significant” and likely to worsen.

“The ongoing fall in Turkey’s reported net reserves in March suggests that the central bank’s true — that is swap-adjusted — net reserve position is getting close to zero,” he said, adding that more data on swaps transactions this month would give a clearer picture.

Mr Setser added:

“Turkey needed more reserves even before the shock from the coronavirus — and it now has an even bigger need.”

The Turkish central bank’s net foreign assets have fallen further in recent weeks as concerns about the economic impact of the coronavirus pandemic have roiled financial markets and sent shockwaves through the global economy. The latest data, from Thursday this week, showed that the central bank’s net foreign assets stood at $19bn.

However, it is difficult to reach an up-to-date figure that excludes swaps because of changes last year that made the total outstanding amount of short-term borrowing more difficult to track. While the central bank does publish the data, it comes out with a lag.

The lira has fallen 3 per cent against the US dollar this month — and almost 8 per cent in 2020 — as investors have offloaded emerging market assets for the safety of the greenback. Even before the Covid-19 crisis, the lira had been under pressure amid tensions between Turkey and Syria and aggressive rate cuts by the central bank. 

The rating agency Fitch warned this week that Turkey’s high external financing requirement, with about $170bn in short-term debt payments coming due this year, made it vulnerable to a deterioration in global market sentiment.

The central bank has always said that investors should look at gross, rather than net reserves. Gross reserves fell to their lowest level since July 2009 at the end of last week, standing at $65.1bn.

That fall came after the central bank lowered the amount of reserves that banks must hold at the central bank as it sought to counter the impact of the coronavirus outbreak on the Turkish economy.

Paul Gamble, head of emerging Europe sovereign ratings at Fitch, said dwindling net reserves would hamper the efforts by Turkish authorities to stabilise the lira. “The net reserve level is not sufficient to enable the central bank to make a sustained defence of the currency,” he said. “If they try that it could worsen market pressures. Many central banks intervene to ease volatility when it comes to exchange rate movements, but Turkey does not have sufficient reserves for a more prolonged defence of the currency.”

Turkey’s central bank did not immediately respond to a request for comment.