​The indexation scheme: some tentative scenarios

TURKEY - In Brief 21 Dec 2021 by Murat Ucer

---

The Ministry of Treasury and Finance released a one-pager today (link here; in Turkish) providing a bit more detail on the planned F/X-indexation scheme. As we wrote yesterday, and it is now widely available in open media sources, the scheme aims to protect TL deposits against exchange rate-driven losses. Today we learnt that this would apply only to household deposits, and to 3-, 6-, 9- and 12-month deposits with a view to, understandably, narrowing the deposit base. The losses or compensation are to be met by the Turkish Treasury, though this is not explicitly mentioned in today’s note, because such action calls for, as we understand it, a new legislation.Leaving aside various technicalities with the scheme, we can think of three broad scenarios going forward. The “success” scenario, and the “failure” scenario that comes in two variants – the dangerous variant (failure with a huge fiscal loss) and the not-so-dangerous variant (failure but without much loss because we do not see a lot of interest in the scheme). We could have a combination of these three scenarios of course, but that’s why we call them “broad” scenarios.First, the scheme succeeds –though with some caveats, as we explain below-- in the sense that TL deposits (which overwhelmingly sit in maturities shorter than 3 months) begin to shift to 3+ month maturities (rather than into F/X), and more importantly: 1) the new money coming into the system is parked in TL deposits; and 2) even better, F/X deposits begin to convert to TL. And – importantly-- as all this happens, the TL depreciates less than 14% (simple), i.e., the minimum rate (read: the policy rate) depositors will be offered, therefore creating no f...