April 29, 2020 / 1:55 PM / a month ago

UPDATE 1-Turkey burning through reserves much faster than in 2019 -bankers

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By Nevzat Devranoglu

ANKARA, April 29 (Reuters) - Turkey’s state banks have sold at least $32 billion worth of hard currency so far this year to support the lira, already matching the value of their market interventions in all of last year, bankers’ calculations based on central bank data showed.

These interventions have sharply eroded an important financial buffer at the central bank, which has ramped up its swaps with state banks to fund their efforts to support the currency, the calculations show.

A drop in the central bank's net FX reserves to $25.9 billion in mid-April from some $40 billion at the start of the year has alarmed economists at a time when the central bank is also funding much of the government's response to the coronavirus pandemic. (Click here tmsnrt.rs/3bOJYmo for reserves vs lira)

Turkey also faces high external debt costs this year of some $170 billion, and it has so far been unable to secure a source of foreign funding that could help it deal with those costs, though it has lobbied for a swap line from the U.S. Federal Reserve.

On Tuesday, the central bank published its latest reserves data that suggested it supplied $32 billion in foreign reserves to state banks via swaps, bankers said, citing their own calculations. Previously, they estimated only $25 billion had been sold this year, after $32 billion in 2019.

The central bank declined to comment.

Central Bank Governor Murat Uysal this month acknowledged that the bank’s reserves have fallen and said it may raise them depending on global conditions and capital flows, a move that could further weaken the Turkish lira. He will likely address the issue at an inflation presentation set for Thursday.

The lira has weakened some 14% this year and about 36% in the last two years. It stood at 6.99 versus the dollar at 0851 GMT after having twice in recent days briefly hit 7, a level traders said the state banks were defending.

“This (state bank action) is the most important factor preventing the rise in dollar/lira, but question marks regarding its sustainability have created fresh selling pressure on the lira in the last few days,” said a forex trader who requested anonymity.

The trader estimated that some $13 billion was sold in each of February and March.

Another trader estimated the central bank’s own reserves fell into negative territory this week, by $2 billion. “No country can withstand such rapid reserve losses for a long time,” the trader said.

Turkey, the 17th-largest economy in the world, is tipping into its second recession in less than two years due to measures to contain the coronavirus outbreak.

Analysts at TD Securities have estimated it may run out foreign currency reserves, including swaps, as early as July if the pressure on its currency keeps intensifying.

Turkey has seen the largest loss of FX reserves of any major emerging market in percentage terms since the end of February, the Institute of International Finance said earlier this month.

Phoenix Kalen, strategist at Societe Generale, said the rise in swaps between the central bank and state banks have allowed reserves to be deployed to support the lira, but it can’t continue indefinitely.

“In battling pressures on the currency, the depletion of reserves suggests that Turkish officials may be forced to consider letting the currency float fully, or alternatively impose tighter capital controls,” she said.

Additional reporting by Ece Toksabay; Writing by Jonathan Spicer; Editing by Hugh Lawson and Toby Chopra

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