Kristian Rouz — Turkey's largest banks continue to sell their hard currency reserves to support the foreign exchange rate of the lira, according to reports, as the nation struggles to re-emerge from last year's currency crisis. Roughly $4.5 bln was reportedly sold over the past two weeks in a bid to reassure investors of the sustainability of Turkey's economy.
Turkey's commercial banks are stepping up their effort to protect economic stability amid the controversy surrounding recent mayoral elections in the capital of Ankara and the nation's economic hub Istanbul.
"State banks intervened again between 18.00-20.00 GMT (Friday)," an unnamed currency investor said, as quoted by Reuters. "So two interventions in the relatively thin end-of-day US time zone."
The government of Turkish President Recep Tayyip Erdogan has insisted on re-doing the Istanbul vote as the ruling party struggled to maintain its grip on power, prompting a sell-off of the lira and resulting in its newest plunge against the dollar. However, with commercial banks selling the greenback, the lira posted a modest rebound Friday.
"At this stage, whatever the result of the re-vote, the impression has been left that the election process in Turkey is not secure," Timothy Ash of Bluebay Asset Management said.
Turkey's central bank has recently tightened its monetary policies in order to support investor confidence and the national currency, although higher borrowing costs could reflect negatively on the pace of economic expansion.
However, the Turkish central bank continued to hike interest rates in a bid to prevent a currency meltdown, with the most recent such move taking place last Thursday. The Central Bank of Turkey raised its base borrowing costs from 8 percent in mid-2018 to the current 24 percent, while inflation remains high at 19.71 percent, far above the central bank's 5-percent target.
Economists say a coordinated effort by the central bank and commercial banks could help maintain price stability in the near-term, despite taking a toll on Turkey's foreign reserves. However, their efforts could be insufficient amid a lack of clear proposals from the government on how to tackle the ongoing crisis.
"The government is still lacking a viable strategy to promote financial stabilisation," Larry Brainard of TS Lombard said. "The new plan is unlikely to make progress in cleaning up banks' balance sheets. This suggests a prolonged financial and economic squeeze lies ahead."
Changes in US monetary policies, as well as political tensions between Washington and Ankara have become an inexcusable concern for many international investors, who have opted to pull out of Turkey.
"The Turkish economy is the perfect showcase for how geopolitics affects economies, or more precisely, how a country's rejection of subordination in international relations leads to threats of economic sanctions by powerful states," Mustafa Metin Basbay of TRT World Research Centre in Istanbul said.
Meanwhile, Turkish pension funds were purchasing the nation's government bonds last week, as reports have circulated taht there was also 'zero sign of offshore buyers'. A slight resulting rebound in the bond value also contributed to the lira's resurgence.
It remains unclear whether the lira will hold its gains come Monday morning in the US. However, the banks' efforts mark a new development in Turkey's economic governance, as they pose a rare example of private sector augmenting central bank policies.