Foreign investments surge, boosting Turkish lira amid local dollar exodus

Minister of Treasury and Finance Mehmet Simsek Monday suggested that the Turkish lira (₺) could have strengthened beyond expectations if the Central Bank of the Republic of Türkiye (CBRT) had refrained from its foreign currency purchases to boost reserves.

Particularly after March 31 elections, the elimination of election uncertainty and the implementation of tight monetary policy have prevented the feared surge in exchange rates, resulting in the U.S. dollar maintaining a stable trajectory against the Turkish lira for the past two months.

Foreign investments in ₺ assets

Following the local elections, up until the week of May 10:

• Approximately $16 billion entered the market through the swap (currency exchange) channel with banks.
• Foreign portfolio investments, primarily in government bonds (DIBS) and to a lesser extent in the stock market, amounted to $5.8 billion in Turkish assets.

This resulted in a total of $21.8 billion in foreign investments during this period.

Local investors divesting from the dollar

During the same period, residents showed notable financial movements:

• Foreign currency accounts decreased from $183.6 billion to $173.6 billion.
• Currency-protected deposits fell from ₺ 2.276 trillion to ₺ 2.196 trillion, equivalent to a reduction of about $2.45 billion.
• Conversely, the use of foreign currency loans increased, with the total volume rising from $134.6 billion to $143 billion after March 29.

It appears that most of these foreign currency loans were converted into Turkish lira, resulting in an additional $20.84 billion in local divestment from foreign currency.

What is 'carry trade'?

Calculations indicate that high-yield Turkish Lira assets attracted approximately $40 billion in local and foreign investments, primarily driven by "carry trade" activities.

"Carry trade" involves borrowing in a low-interest-rate currency and investing in a high-interest-rate currency. This strategy is central to the recent financial transitions observed.

Dollar-TL exchange rate as of May 21

With significant capital inflows into the Turkish lira, the exchange rate remains stable. On May 21, the U.S. dollar traded at around ₺ 32.21.

Notably, over the past six months, the Turkish lira has offered a top-tier "carry trade" return of nearly 12%.

Russia and Mexico follow with close to 8% "carry trade" return.

May 31, 2024 04:59 PM GMT+03:00