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FT calculations show Turkey's central bank has been propping up foreign currency reserves. That raises fear about the country's ability to defend itself in a fresh lira crisis.
Reported net foreign reserves stood at $28.1bn in early April. But the FT's analysis suggests this figure has been enhanced by an unusual surge in the use of short term borrowing, or swaps. Strip these out, and the total reserves fall to less than $16bn. Investors already believe that the level of reserves was inadequate because of Turkey's need for dollars to cover debts and foreign trade. The use of swaps sharpens fears that the central bank has been burning through its hard currency to prop up the lira, and that without this support the currency would be weaker.
In the wake of the FT analysis, the currency has fallen 1 and 1/2 per cent against the dollar, taking it back to levels last seen in October. Turkey has been under pressure since last summer, when an overheating economy fed through into rising inflation and a widening current account deficit. In most countries, the central bank would simply have raised interest rates. But President Recep Tayyip Erdogan is an outspoken critic of higher rates. He claims an interest rate lobby is seeking to crimp the Turkish economy by strangling growth. Against this backdrop, the central bank was slow to tighten monetary policy.
As foreign investors lost confidence, the lira plunged 30 per cent, fuelling a further surge in inflation to 25 per cent. When monetary policy was belatedly tightened, the Turkish economy predictably fell into a deep recession. Skittish investors will now be concerned the return to stability has in part been engineered by the central bank's intervention.
