Turkey’s government is on a quest to secure new foreign exchange inflows from “friendly” countries, among them Saudi Arabia and Qatar, as international observers warn that a fresh currency crisis could be inevitable for the country.
With crucial elections looming in June, such inflows are important to prop up the embattled Turkish lira and avert another whirlwind of price hikes, but how much those efforts could help remains open to question.
A hard currency shortfall is at the core of Turkey’s economic turmoil, and with foreign investors staying away, the government has had to use diplomatic channels to secure billions of dollars in foreign funds to ease the crunch — an effort that is likely to continue until the elections. The funds have been used to funnel hard currency to the market and manage expectations in a bid to control exchange rates, which are crucial for an economy that is heavily reliant on imports, including energy. The lira has lost more than half of its value against the dollar since September 2021, when the central bank embarked on unorthodox rate cuts at the behest of President Recep Tayyip Erdogan.
A number of outside watchers have come to argue that Turkey is headed for a fresh currency shock. Japanese bank Nomura, for instance, warned last week that Turkey is at high risk of a currency crisis, along with six other emerging economies: Czech Republic, Egypt, Hungary, Pakistan, Romania and Sri Lanka.
Such analyses rest largely on two key indicators: a country’s short-term external liabilities, and current account deficit.
Turkey’s external debt maturing over the next 12 months amounts to some $185 billion, while its current account deficit reached $38 billion in the first eight months. Both problems are seen as hard to surmount. Also, Turkey’s risk premium — reflected in credit default swaps that determine the cost of insuring exposure to a country’s sovereign debt — has largely decoupled from those of peer countries, hovering between 500 and 600 basis points. This leads many to conclude that the country will struggle to borrow from foreign markets. The downturn in foreign direct and portfolio investments compounds the view that great trouble is looming for Turkey in securing the foreign currency it needs. So, the argument goes, growing pressure on the lira and a fresh price storm are inevitable.
Such arguments, however, fail to adequately reflect how Erdogan’s government has turned up the pressure on companies and banks in a bid to curb dollarization and used non-economic channels to secure foreign funds.
In early September, Erdogan openly said that “friendly countries” were helping to shore up the central bank’s depleted foreign reserves. “Our borrowing from them makes our central bank stronger. Hopefully, we’ll succeed in this and overcome the foreign currency hardship,” he said.
That “friendly” support has consisted mostly of currency swaps equivalent to nearly $30 billion, which have served largely to window-dress the central bank’s reserves but also as hot hard currency. Erdogan has sought to increase such inflows as the elections near, using political ties.
Having recently reconciled with Turkey after years of bad blood, Saudi Arabia is now set to assist Turkey financially. The kingdom is in the “final” stage of talks to deposit $5 billion in Turkey’s central bank, a Saudi official said last week.
Also last week, Reuters reported that talks are in final stages for Qatar to extend up to $10 billion in funding to Turkey, a close ally, including up to $3 billion by the end of the year.
In January, Azerbaijan’s state oil fund SOFAZ said it had placed a six-month deposit of 1 billion euros with Turkey's central bank as “a line of support for the country’s financial stability.” It later extended the deposit to the year-end.
In July, Russia’s state-owned nuclear energy company Rosatom sent $5 billion to its subsidiary in Turkey, which is building the country’s first nuclear power plant, in what was touted as the first tranche of transfers planned to reach $15 billion.
Amid such inflows and government restrictions on banks and companies, the lira has stayed relatively stable, particularly since September.
Yet Ankara’s efforts to suppress exchange rates appear to backfire on a deposit scheme introduced in December to reign in dollarization. Under the scheme, which has attracted up to 1.5 trillion liras ($80.5 billion), the treasury compensates lira depositors for any losses they incur from the fall of the currency. A relatively stable lira means the returns of depositors are not increasing. According to media reports, the total sum of deposits in the scheme decreased for the first time in mid-November. At least some of the outgoing depositors are likely to put their money in hard currency again, adding to the headwinds for the lira.
Moreover, price increases remain the main concern of voters. Annual consumer inflation topped 85% in October, with food inflation hitting 99%. The rate is bound to drop to a level of 65% to 70% starting from December due to high base effects from the previous periods. But as long as monthly price increases remain at about 3%, popular grievances would continue despite pay hikes at the year-end. And suppressing foreign-currency prices may not be enough to prevent such a prospect.