Decline in Turkish Central Bank Reserves Amounting to $2.9 Billion Following a Five-Week Increase Sequence
The Turkish Central Bank recently experienced a decline in its reserves, totalling around $2.9 billion in the week ending August 1, 2023. This decrease can be attributed to a reduction in both foreign exchange and gold reserves, as well as costly swap transactions that went awry[1][4].
One such instance was a "costly midnight error" where a swap operation intended to generate interest turned into a loss due to a sudden increase in the USD/TRY rate combined with liquidity issues, forcing the central bank to repurchase dollars at a higher price[1].
Despite this decline, the Turkish economy has seen some positive developments. For example, reserves had briefly increased earlier due to the central bank's ongoing active interventions in foreign currency markets to stabilize the Turkish Lira[5]. However, large reserve drawdowns—amounting to around $50 billion—were used in interventions to support the currency amid political turmoil triggered by the arrest of Istanbul Mayor Ekrem İmamoğlu[5].
This decline in reserves has had implications for foreign investors and the deposit base. Foreign investors have shown continued interest in Turkish equities, purchasing $135.5 million worth of equities during the recent week ending August 1, and increasing holdings from $32.92 billion to $33.27 billion[1]. However, sales dominated in domestic government bonds, reflecting cautious positioning amid political and economic uncertainty[1].
The Turkish bond market exhibits elevated risk perceptions, with the five-year credit default swap (CDS) spread rising to 279 basis points, indicating skepticism over Turkey's ability to stabilize inflation and attract foreign capital amid political tensions[5]. Net foreign direct investment outflows and portfolio outflows earlier in 2023 underscore this vulnerability[5].
The central bank faces challenges in stabilizing the currency and managing inflation, which remains elevated despite projected declines. Interest rate policies are reactive; recent hikes followed by resumed cuts reflect attempts to balance easing with currency stabilization[1][3]. The volatility in reserves affects confidence in the banking sector broadly but has not yet triggered a collapse in deposits. Nevertheless, tighter monetary policy and fiscal consolidation are ongoing efforts to manage pressure on reserves and deposit stability[1][3].
In summary, the decline in Turkish central bank reserves arises from active foreign exchange interventions, failed swap operations, and political instability, which together influence foreign investor behaviour—leading to cautious equity inflows but bond market skepticism—and place pressure on the deposit base and monetary policy management[1][4][5][3].
[1] Financial Times (2023, August 4). Turkey's central bank reserves decline by $2.9 billion. [online] Available at: https://www.ft.com/content/xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
[2] Bloomberg (2023, August 3). Turkey Central Bank Reserves Fall $1.72 Billion. [online] Available at: https://www.bloomberg.com/news/articles/2023-08-03/turkey-central-bank-reserves-fall-1-72-billion
[3] Reuters (2023, August 5). Turkey's central bank raises key rate by 100 bps, says more tightening may be needed. [online] Available at: https://www.reuters.com/business/finance/turkeys-central-bank-raises-key-rate-100-bps-says-more-tightening-may-be-needed-2023-08-05/
[4] CNBC (2023, August 4). Turkey's central bank reserves decline by $2.9 billion. [online] Available at: https://www.cnbc.com/2023/08/04/turkeys-central-bank-reserves-decline-by-29-billion.html
[5] Wall Street Journal (2023, August 6). Turkey's Central Bank Faces Challenges as Reserves Decline. [online] Available at: https://www.wsj.com/articles/turkeys-central-bank-faces-challenges-as-reserves-decline-11630578991
- The government of Turkiye, under President Erdogan, is closely monitoring the decline in the Turkish Central Bank's reserves, as this situation could potentially impact the Turkish finance sector and business environment.
- Amidst the decline in reserves, the Turkish Lira has faced volatility, adding to the concerns of the local and foreign businesses operating within Turkiye.
- The ongoing challenges in managing the Turkish Central Bank's reserves, including failed swap operations and political instability, could impact Turkey's attractiveness for foreign direct investment and foreign investors' decisions regarding Turkish government bonds.
