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Reserves at $100 Billion Shield Lira as Bonds Win: Turkey Credit

Updated on
Reserves Topping $100 Billion Shield Lira as Yields Tumble
Traffic passes the headquarters of Turkey's central bank in Ankara. Photographer: Kerem Uzel/Bloomberg

Foreign-exchange reserves at Turkey’s central bank surpassed $100 billion, the highest on record, helping policy makers limit swings in the currency and serving to underpin the world’s biggest bond rally.

The reserves at the central bank reached $100.17 billion on Nov. 30, the highest since at least 1988, according to data compiled by Bloomberg, up from $75.3 billion in January. Turkish reserves compare with $260 billion for India and $10.5 billion for Egypt. Lira volatility fell to 6 percent Dec. 13, the lowest among emerging markets in Europe, helping bond yields fall 520 basis points this year in the biggest drop globally.

Fitch Ratings cited the $24 billion increase in foreign-exchange and gold reserves when it raised Turkey to investment grade last month. Central bank Governor Erdem Basci spent $16.1 billion of the bank’s reserves in direct dollar sales and daily foreign-exchange buying between August 2011 and January 2012 to defend the lira as the current-account deficit jumped to a record high. The currency has rebounded 6 percent this year.

“Various tools implemented by the central bank allowed Turkey to gradually build bigger buffers,” Piotr Matys, an emerging-market analyst at 4cast Ltd. in London, said in e-mailed comments yesterday. “Turkey’s foreign-exchange reserves are now more than adequate to provide financial stability if required, covering more than five months of imports.”

Rate Cut

Basci introduced an interest-rate corridor in October 2011, which lets him adjust borrowing costs daily, a policy which has allowed him to cut bank borrowing costs and reduce inflation.

He also increased the proportion of required reserves lenders can keep in foreign exchange instead of lira to 60 percent from 55 percent and the part that can be kept in gold to 30 percent from 25 percent on Aug. 16, saying the changes may add as much as $7.3 billion to the bank’s foreign-exchange reserves. The central bank said today it raised the reserve option coefficient for the reserves that can be held in gold by 0.1 percentage point, which was expected to add $850 million to the reserves.

The bank lowered its benchmark one-week repurchase rate today for the first time in 16 months to a record low of 5.5 percent from 5.75 percent.

Basci said on Nov. 12 in an interview with Anadolu Agency Finans that the central bank may tighten monetary policy through banks’ reserve requirements should it be needed after the Fitch upgrade.

Lira Volatility

Basci said at a press conference in Antalya on Dec. 11 that he’s watching the real effective exchange rate against Turkey’s main trading partners, which was at 119.2 in November. The central bank will act to reverse lira gains should the measure strengthen to between 125 and 130, he said.

“Reducing lira volatility was a specific aim of the central bank and it is fair to say they have been somewhat successful,” Christian Lawrence, a currency strategist at Rabobank International in London, said in an e-mail yesterday. “With the central bank now focusing on the real exchange rate, we expect reserves to keep rising.”

Foreign investors bought a net $17 billion in Turkish debt in the 52 weeks to Dec. 7, bringing their total holdings to almost $62 billion, according to data published by the central bank on Dec. 13.

Current Account

Foreign exchange reserves are still low compared with peers and the bank’s innovative mechanism for varying reserve requirements remains “untested,” Sarah Carlson, a senior credit analyst at Moody’s Investors Service, said at a conference in Istanbul on Nov. 21. Moody’s rates Turkey at Ba1, its top non-investment grade.

Turkey needs such big reserves “due to the still-high current-account deficit,” Thu Lan Nguyen, a currency strategist at Commerzbank AG in Frankfurt, said in e-mailed comments yesterday. “Even at 7 percent of gross domestic product this year, it still is one of the highest deficits within Europe, the Middle East and Africa,” she said.

The lira rose 0.2 percent to 1.7816 per dollar at 5:03 p.m. in Istanbul today, extending this year’s gains to 6.1 percent. The yield on two-year notes increased seven basis points to 5.81 percent.

Default Swaps

Five-year credit-default swaps on Turkey climbed two basis points, or 0.02 percentage point, to 124. That compared with 130 for Russia, 80 for Poland and 144 for South Africa. Rising prices show worsening perceptions of a borrower’s creditworthiness. The contracts pay the buyer face value in exchange for the underlying securities or cash if a borrower fails to adhere to its debt agreements.

The extra yield investors demand to hold Turkish debt denominated in dollars rather than U.S. Treasuries fell 2 basis points to 180, according to JPMorgan Chase & Co.’s EMBI Global Index. The premium compares with 385 at the end of last year, and 167 for Russia.

“Essentially the Turkish central bank is using a combination of different policies to protect the currency,” Simon Quijano-Evans, ING Groep NV’s London-based head of emerging-market research for Europe, the Middle East and Africa, said in e-mailed comments yesterday. Reserves “should be seen as part of a package of tools that complement one another.”

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