​Quick reactions to TL’s sharp appreciation

TURKEY - In Brief 20 Dec 2021 by Murat Ucer

After weakening past the 18-mark against the USD, the TL appreciated dramatically after President Erdogan’s statements this evening (link here). Although markets are too illiquid to attribute too much significance to this very sharp movement, it appears to have been triggered by Erdogan’s announcement of a new financial instrument targeted at stopping and/or reversing dollarization. Important details as to what exact form this instrument will take and how it will be applied or administered are unclear, but the main idea seems to be to cap the downside for TL depositors by, in effect, indexing these deposits to the exchange rate. This will be done by way of compensating the depositors (in TL) for the difference between currency depreciation and the TL interest rate. We have to see the details and think through them, but our first reaction is that this seems to be an effort to buy time rather than anything else, as Ankara implements its New Economy Model, i.e., continue lowering rates in the hope of lowering inflation, in the meantime. The scheme could help to stop the freefall in the TL for a while as people try to assess and digest the new instrument, leading to some sort of herding around the “good” equilibrium perhaps, but ultimately it will boil down to economic fundamentals and Ankara’s credibility, neither of which can possibly improve, in our view.In that sense, this new episode smacks of the swap scheme with banks that the CBRT introduced back in 2019, and used extensively in 2020, which helped to stabilize the TL to some extent, yet at the expense of inflicting even bigger imbalances down the road. This scheme, too, could potentially lead to huge losses for the...

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