Turkish central bank stirs concerns with opaque funding tool
Turkey’s central bank has sparked a fresh wave of concern among investors and analysts after saying it is supplying billions of liras to the financial system through an opaque market.
After a heated series of questions from journalists and analysts on Thursday, governor Murat Uysal publicly acknowledged for the first time that the central bank has been using the Istanbul stock exchange to conduct swap operations — taking dollars from Turkish financial companies in exchange for lira — as a means of “providing funding to the banks”.
Previously, the central bank had largely done that through the repo market, where users exchange high-quality collateral for cash, or through its own swaps facility, where interest rates are publicly available.
The switch to the stock exchange stirs concerns that the central bank could effectively be undercutting its own benchmark interest rates. This is viewed by analysts as a risky punt considering inflation is still running at close to double the 5 per cent target, and given the central bank’s recent series of benchmark rate cuts.
Turkey’s shift to using the Borsa Istanbul swap market also raises fresh questions about the true level of the foreign currency reserves the central bank has available to defend the lira and underwrite Turkey’s large external debt burden.
“We don’t know the size of these transactions. We don’t know the interest rate applied on these transactions,” said Haluk Burumcekci, founder of the Istanbul-based Burumcekci Research and Consulting, who challenged Mr Uysal at Thursday’s meeting on the lack of transparency. “These are question marks.”
Economists and analysts had been puzzled in recent months by a sharp drop in the volumes of funding being provided to the market through the conventional channel of short-term repurchase agreements.
On Thursday, Mr Uysal confirmed suspicions that the central bank had turned to the exchange instead, saying the total value outstanding on the Borsa Istanbul swap market was around $12bn to $13bn. He did not say what share of the central bank’s overall funding that represents.
Speaking at the central bank’s regular inflation report event, Mr Uysal sought to allay some concerns, saying that using swaps to provide funding to the market was a “conventional instrument used by central banks all over the world” and that the bank was transparent about the matter. He also suggested that the rate applied to this swaps-based funding was in line with the benchmark one-week repo rate of 14 per cent, but did not give precise details.
An executive at a Turkish investment bank, who asked not to be named, said there was now a lack of clarity about the rate at which the central bank is providing lira funding because the mechanisms the central bank uses have “dispersed”.
The central bank came under fire earlier this year after the FT reported that dollars borrowed by the central bank through its own swaps facility were helping to disguise a drop in net reserves — a fall that many investors believe was caused by supplying dollars to state banks that in turn sold them to prop up the lira.
Since August, use of that facility had all but evaporated. Now, though, it is clear that the use of swaps has persisted through the Borsa Istanbul.
The limited data publicly available about the stock exchange’s swap market makes it more difficult for investors to estimate their impact on the bank’s reserves, which have climbed since their March 2019 nadir.
While the central bank publishes weekly figures for net and gross foreign currency reserves, data on short-term swaps is published on a monthly basis with a lag of several weeks. The most recent data, released last week, is from September 30. It showed the outstanding total for swaps with a maturity of less than one month as $12.5bn.
“If we can get timely information on the size of these swaps, the issues about the real level of reserves can be addressed easily,” said a London-based analyst, who asked not to be named. “But now it’s not that easy.”
Pressed on why it was funding the market through swaps, Mr Uysal said that Turkish banks had a “structural” need for the instruments, adding: “We don’t want them to be dependent totally on the banks abroad.”
Ugur Gurses, a prominent economic commentator and former central bank official who raised the issue at Thursday’s meeting, said using swaps could be a neat way to help banks obtain lira, which has become harder since efforts to thwart foreign speculators.
Mr Gurses also believes, however, that another aim of the policy may be to supply foreign currency to state-owned banks in order to enable them to sell dollars to artificially support the lira. “There’s a huge mechanism that [the central bank] established to intervene in the [currencies] market,” he said. “It’s killing two birds with one stone.”
Additional reporting by Chelsea Bruce-Lockhart
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