A bet against the lira … the Turks are hoarding gold and the dollar


The Turkish lira finds itself caught between a tug of war from foreign investors, who have welcomed the significant increase in the interest rate and the government’s promises of reform, and citizens who are cautious and hoard gold and the dollar.
According to “Reuters”, the currency witnessed a turbulent month after a weak performance this year in emerging markets. Whether it will be able to avoid new record lows will contribute to determining the success of the Turkish president’s commitment to a new economic era inspired by market mechanisms.
The lira rose nearly 12 percent after Erdogan replaced the head of the central bank and the finance minister in a shocking reshuffle earlier this month. The following week, foreigners rushed to buy $ 5 billion in Turkish assets, according to bank accounts.
But the currency returned to decline 5 percent this week as Turks and local companies entered the line by buying up to $ 2.5 billion in hard currency at a price they saw cheaply, and bankers say that “larger companies may have entered the market to obtain hard currency in order to fulfill increasing external debt obligations.” .
Foreign exchange holdings in Turkey have reached their highest level at $ 228 billion, and the main reason for this is the import of gold, about $ 22 billion this year, which is a store of value that Turks like, especially in times of uncertainty.
“People buy gold after selling their cars or homes, or they buy it with their money directly,” said Mehmet Ali Yildirim Turk, vice president of an association of gold shops in Istanbul who has a shop in the city’s Grand Bazaar.
“The commitment to economic reforms has created optimism in the market, but these promises must be fulfilled through concrete steps,” he added.
Erdogan has long blamed foreigners and higher interest rates for a dire economic downturn, and the lira’s collapse by more than 50 percent since early 2018.
The shift in his speech this month about foreigners and interest rates came after the currency recorded a series of record lows and in light of dwindling central bank reserves of foreign currency.
The authorities began to solve the restrictions on investment abroad, including the limits imposed on foreign exchange swaps in pounds, which were adopted last year in light of the lack of confidence in foreigners.
But the changes will proceed slowly because tens of billions of dollars the central bank has cannot act to boost reserves.
This results in pent-up demand among foreigners who can only get a 10.5 percent return on Turkish assets in a London swap market, even after Turkey’s central bank raised the interest rate 475 basis points to 15 percent last week.
“We are definitely seeing a more traditional policy mix and we are positively dealing with these changes but cautiously,” said Kiran Curtis, emerging markets portfolio manager at Aberdeen Standard Investments, which distanced itself for a long time before buying Turkish assets this month.
He added that “raising the interest rate again next month by 50 basis points would be” logical “and may keep foreigners’ interest.
Foreign inflows may help keep Turkey’s ballooning current account deficit under control after the fallout from the coronavirus pandemic reduced tourism revenues by nearly $ 20 billion.
The rise in gold increases trade disruption and the risk of external debt default, according to credit rating agencies and analysts. The central bank expects gold imports to reach $ 24 billion by the end of the year, more than twice the natural rate.
A wealth manager in a Turkish bank, who asked not to be identified, said, “Since the sixth of November, clients have been urging them to form credit centers in the lira.” “But as we see, citizens bought about four billion dollars in gold and foreign exchange in just two weeks,” he said.


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