Turkey may run out foreign currency reserves by July

Turkey may run out foreign currency reserves as early as July if the pressure on its lira currency keeps intensifying, analysts at TD Securities estimated, while a number of analysts said its net reserves excluding swaps may already be negative.

The central bank said last week its ‘net’ international reserves had dropped to $25.9 billion from over $40 billion at the start of the year.

A number of economists have highlighted, however, that $25 billion of currency swaps carried out by the central bank to try to ease the pressure now flatter its reserves figures, as they add assets to its balance sheet without corresponding liabilities.

“In a nutshell, the CBRT (central bank) may have only had $1.4 billion of net reserves left as of 22 April,” TD Securities’ Head of Emerging Markets Strategy, Cristian Maggio, said, subtracting the swaps from the official reserves number.

“But swaps increased by another $1.8 billion to $25.6 billion between 22 and 24 April, suggesting that the CBRT has already run out of net reserves at the start of this week.”

The central bank did not immediately respond to a request for comment.

Turkey’s Oyak Securities also sent a note to clients on Monday saying the country’s net reserves excluding swaps were now likely to be at a “negative level.”

The lira has fallen 14 percent so far this year, and 40 percent in the last two years, as a combination of slowing growth and geopolitical uncertainty have compounded investors’ unease at the country’s wild interest rate cycles.

Central bank reserves have thinned in large part because of state-controlled banks’ market interventions to stabilize the lira that began just over a year ago but have ramped up to nearly $20 billion in recent months.

The Institute of International Finance estimated earlier this month that Turkey, the 17th-largest economy in the world, has seen the largest loss of FX reserves of any major emerging market in percentage terms since the end of February.

Its central bank governor, Murat Uysal, recently acknowledged the drop in reserves but stressing steps could be taken to boost them “depending on the global conjuncture and trend of capital flows.”

Maggio said Ankara could utilise commercial bank’s deposits and sell gold to cover itself in the short term, but warned it wouldn’t last long if the lira’s woes continued.

The central bank is currently spending around $440 million a day. At that rate it will have completely burned through its gross FX reserves excluding gold by early July, and used up all gold available by the third week of September, Maggio estimated.

FX interventions seem to be rising however, Maggio said, meaning its spending could rise to $666 billion a day by the end of May and possibly even more beyond that.

“At this accelerating pace, the CBRT will eat into its FX reserves excluding-gold by mid-June, and into total reserves including gold by the third week of July,” said Maggio.

That could force the central bank, which has been aggressively slashing interest rates over the last year to sharply hike them again.

If that failed it could introduce tight capital controls and even seek help from the International Monetary Fund, something Turkish President Tayyip Erdogan has strongly rebuked in the past.

“Before reaching the point of no return (in terms of reserves), we think the CBRT will have to deliver: 1. Dramatic interest rate tightening, 2. Likely introduce tight capital controls,” Maggio said.

“Multilateral support is also a scenario… but that would likely happen in conjunction with, not alternatively to, the first two conditions.”