Turkey's central bank, the Turkiye Cumhuriyet Merkez Bankasi (TCMB), has acknowledged publicly for the first time that its use of currency swaps 'may impact reserve figures'

Turkey’s central bank has bolstered its foreign currency reserves with billions of dollars of short-term borrowed money, raising fears among analysts and investors that the country is overstating its ability to defend itself in a fresh lira crisis.

Reported net foreign reserves held by the central bank stood at $28.1bn in early April — a sum that investors already believed was inadequate because of Turkey’s heavy need for dollars to cover debt and foreign trade. But calculations by the Financial Times suggest that this total has been enhanced by an unusual surge in the use of short-term borrowing, or swaps, since March 25. Stripping those swaps out, the total is less than $16bn.

Analysts and investors, already skittish about putting money to work in Turkey given the direction of economic policy under President Recep Tayyip Erdogan, are concerned that the state of the financial defences leaves the country ill-equipped to deal with any potential market crisis.

The lira dropped as much as 1.9 per cent in morning dealings in London on Thursday, reaching TL5.847, the weakest point since October 2018, Refinitiv data show.

In a written response to questions from the Financial Times, the central bank acknowledged publicly for the first time that its use of currency swaps “may impact reserve figures”, but said its method for accounting for them was in “full compliance with international norms”.

However, some market watchers were uncomfortable. “I don’t think these are conventional operations and they are somewhat less than transparent,” said Julian Rimmer, an emerging-market equities trader at Investec Bank. He added: “A central bank cannot risk being seen as economical with the truth.”

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A former senior official at Turkey’s central bank, who did not wish to be named, said the extra dollars had been borrowed, not earned. “This is not an orthodox [approach to] central bank reserve build-up.”

The currency briefly tumbled late last month on concerns about a sharp drop in foreign reserves, in an echo of the crisis that engulfed the lira last summer and triggered a blast of inflation and the first recession in a decade.

The bank’s reserve figures eventually began to climb again. But the analysis by the FT raises questions about that recovery.


The central bank’s short-term borrowing reached as much as $13bn by April 8 — a sharp increase from January 1 to March 25, when borrowing never exceeded $500m, according to the central bank’s figures available through the Bloomberg data service. It has borrowed the money from Turkey’s banks, which are flush with dollars after individuals and companies flocked to hard currency as a haven.

“There’s a general unease about what’s going on behind the scenes,” said Tim Ash, an emerging markets strategist at BlueBay Asset Management. A lack of transparency was undermining the central bank’s already fragile credibility, he warned.

Five other investors and analysts who have closely studied the bank’s activities in recent weeks spoke on condition of anonymity to the FT about their concerns over the reserves. Several of them were fearful of speaking out on the issue after Turkish regulators launched probes into JPMorgan last month over its advice to clients to sell the lira.

Turkey's President Recep Tayyip Erdogan talks to members of the media regarding the local elections, in Istanbul, Monday, April 8, 2019, prior to his departure for Russia. Erdogan has defended his ruling party's move to demand a full recount of votes cast in mayoral elections in Istanbul, claiming that "almost all" of the voting was marred by irregularities. Erdogan suffered a major setback in last week's local elections after the opposition took control of the capital Ankara and won a tight race for Istanbul. (Presidential Press Service via AP, Pool)
International investors are concerned over the direction of economic policy under President Recep Tayyip Erdogan © AP

Investors said they were worried about the practice of using one-week currency swaps, in which liras are exchanged for US dollars with local banks with an agreement to later reverse the transaction. They believe this borrowing has flattered the central bank’s reserves data.

Some investors argue that the borrowed money should be stripped out of net foreign reserve data, leaving a remaining sum that is well below $20bn.

In its response to the FT, the central bank confirmed that dollars borrowed in the first part of these transactions are added to the balance sheet. The obligation to later repay the dollars is recorded as an “off balance sheet item”.

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The use of swaps has sharpened fears that began to gather last month that the bank was burning through its hard currency to hold the lira steady in the run-up to local elections on March 31. The central bank declined to comment on whether it has intervened in this way.

The impact of the swaps transactions is most vividly illustrated in the central bank’s daily balance sheet, which contains figures for foreign assets and liabilities that have been intensely scrutinised by analysts in recent weeks.

Net foreign assets, calculated by subtracting the bank’s foreign liabilities from its assets and converting into dollars, have risen and fallen in parallel with the amount borrowed through swaps. The net foreign assets figure, a proxy for the country’s financial defences, slumped by $9.4bn between March 6 and March 22 to $19.5bn, the lowest level on a US dollar basis since 2007.

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By April 5, the figure had recovered to $23.6bn, boosted by an increase in swaps. Excluding swaps, net foreign assets have stood at less than $11.5bn during the entire month of April, down from $28.7bn at the start of March on the same basis.

While the central bank said its steps were in keeping with international norms, some analysts and investors say these tactics risk undermining its credibility.

Piotr Matys, an emerging market currency strategist at Rabobank, said the use of swaps seemed to be “some sort of window dressing” to create the impression of higher reserves.

Adding to the anxiety, the boost to reserves does not precisely match the scale of borrowing through swaps, raising questions about whether some of the borrowed funds were used to support the lira. The central bank did not directly respond to a question about the discrepancy, nor to a question about whether it used measures to prop up the currency since the March 31 elections. However, it did say a variety of factors could account for the shifting total.

The swaps transactions were among the many tools the central bank used to “contribute to domestic banks’ efficiency and flexibility in their liquidity management”, the central bank said, adding: “The [Turkish central bank], as other central banks, considers all of its gross reserves as freely usable to meet liabilities and a range of policy objectives.”

The central bank suggested that analysts were wrong to focus on a net international reserves figure that is published once a week. It stressed that international reserve adequacy measures used gross figures to test a country’s preparedness. Turkey’s gross foreign reserves stood at about $77bn in the first week of April.

But many analysts see both the gross and net sums as inadequate for a country with a volatile currency and $177bn in short-term external debt coming due in the next 12 months.

“The bottom line is that they don’t have enough, whether it’s net or gross,” said Mr Ash at BlueBay. “Everyone in the market knows that Turkey doesn’t have enough foreign currency reserves to mount a sustained and credible defence of the lira.”

Additional reporting by Robert Smith

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