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Strong signs of normalization for Turkish economy as dollar remains stable: Analyst

Strong signs of normalization for Turkish economy as dollar remains stable: Analyst
By Omer Faruk Bingol
May 31, 2024 8:59 AM

Türkiye’s economy is showing clear signs of stabilization, driven by rational policies and a normalization process. Recent trends in Turkish lira and foreign currency deposits, interest rates and exchange rates contribute to macroeconomic balance.

The country’s risk premium has dropped below 260, and the dollar has hovered around ₺32.00 over the past two months, starting at ₺32.24 on March 31.

Deposit interest rates fall 

To boost the appeal of the Turkish lira and effectively combat inflation, deposit interest rates, including Exchange Protected Deposit accounts (KKM accounts), surged to an average of 68.88% for 1-3 month terms in the week of April 19. However, the latest Central Bank of the Republic of Türkiye’s (CBRT) data shows a drop to 61.77% last week. Despite this, exchange rates have remained stable, and CBRT interventions have prevented the dollar from falling below ₺30.00.

The decline in foreign currency accounts

There’s been a significant reduction in domestic and foreign currency accounts, which peaked at $185.83 billion in the week of March 22 before local elections. By the week of May 24, they had fallen to $170.60 billion, marking a $15 billion decrease over nine weeks.

A similar trend is observed in KKM accounts. From ₺2.576 trillion at the start of the year, they dropped to ₺2.161 trillion last week, with a ₺127 billion reduction in the last nine weeks.

Net reserves positive without swaps

Interest from foreign investors in Turkish lira-denominated instruments, particularly Turkish bonds, has increased, boosting foreign currency inflows. Foreign bond holdings reached a seven-year high of $9.85 billion last week and are estimated to surpass $10 billion this week.

Since April 1, short-term currency inflows, known as “carry trade,” have amounted to approximately $16 billion.

With the decline in domestic and foreign currency accounts and substantial foreign inflows, CBRT’s net reserves, excluding swaps, have turned positive for the first time in 4.5 years. Including approximately $9 billion in Treasury-held currency, CBRT’s net reserves, excluding swaps, rose to $0.9 billion.

Normalization achieved

The Turkish central bank’s policy interest rate is 50%, while the Turkish lira overnight reference rate is 52.21%. With a base effect expected to lower the Consumer Price Index (CPI) by about 20 points in June and July, policy rates and inflation are projected to align closely.

However, a side effect of stable exchange rates is a rising trade deficit. April’s deficit was the highest in nine months, at $9.86 billion.

Consumption goods accounted for 15% of the $113 billion imports in January-April, a trend closely monitored by economic authorities.

Last Updated:  Jun 8, 2024 12:29 PM