Turkish central bank governor’s statements on reserves raise questions

On April 23, Turkey’s central bank governor Şahap Kavcıoğlu made statements on the state of central bank reserves in a joint broadcast by CNN Türk, TRT Haber and A Haber.

Kavcıoğlu announced the central bank’s gold and foreign exchange reserves live, claiming that the bank had 720 tons of gold in its vaults.

“There have been 120 tonnes of gold in Turkey for years,” Kavcıoğlu said. “Turkey currently has 720 tonnes of gold in its central bank reserves. All of Turkey’s gold is now in the Central Bank. We now have $ 90 billion in gross reserves. “

A ton of gold worth 51.5 million today. The value of 720 tons of gold is $ 37.8 billion. Gross reserves are holdings of hard currency.

“The figures I gave are clear and correct,” Kavcıoğlu insisted.

And they obviously are. But it seems that Kavcıoğlu only cited the “assets” part of the balance sheet. The central bank also has commitments, and it seems to have ignored them in its statements.

At the time of writing, central bank reserves are unmistakably negative due to massive liabilities, mostly in the form of swaps. Goldman Sachs recently estimated this debt at $ 60 billion, but economist Güldem Atabay puts it at less than $ 48 billion. The difference may be due to the recent sale of gold reserves by the central bank, which now appear to be reduced to 547 tonnes or $ 24.94 billion in value.

Turkey sold nearly 11.7 tonnes of gold in February, according to to a World Gold Council report.

As of April 8, Reuters data showed Turkey’s central bank’s outstanding swap transactions amounted to $ 41.116 billion. Reserves are again, unquestionably in deeply negative territory once swaps are deducted.

An International Monetary Fund (IMF) report confirms the impact of swaps for reserves.

IMF Noted in June 2020 that “the outstanding foreign exchange and gold commitments arising from [the central bank’s] financial derivative activities with resident and non-resident banks recorded $ 55.3 billion, of which $ 20.1 billion is due in one month ”.

This is an important detail, Explain economist Mustafa Sönmez regarding the amounts obtained through currency swaps with foreign central banks and local banking players. As a result, it reveals that over 60% of reserves have been secured by swaps or “derivative financial activities”.

All of this explains why analysts have expressed outrage and contempt at the central bank’s rhetoric.

“There is no defense for the literally silly currency management policy. I don’t think the money was stolen simply wasted on a downright stupid monetary policy that endangered the very stability of the entire financial system. Agbal knew it, he spoke up, + was fired, ” mentionned Timothy Ash of Bluebay Asset Management.

What can be done? Attracting foreign investment is essential. But, while the value of the Turkish Lira is at record highs – nearly 10 for the euro and 8.30 for the dollar at the time of writing – there is little room for action.

Foreign investors might be tempted to invest with high interest rates of 19%, but it’s hardly worth earning lira when their value is so low.

“This means that the government is likely, once again, to try to stimulate the economy through low interest rate policies, ”said Selva Demiralp, director of the Koç-TÜSİAD University Economic Research Forum in Istanbul.

“Such a priority possesses a high potential for backfire by putting extreme pressure on the lira and further contracting the economy, ”she said.

“There is now a very real chance that Turkey will be title for a messy balance of payments crisis, ”wrote Jason Tuvey, analyst at Capital Economics, in a note.

Foreign investors have lost confidence in the country. Unless there is a serious policy change on the part of the government, there is little chance of avoiding a crisis in as little as a few months.




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Louis Miller

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