Turkey Central Bank Plans FX Hedge Instrument for Corporates

(Bloomberg) -- Turkey’s central bank said Monday it would start offering a financial instrument that would allow companies with foreign currency liabilities to protect themselves against any drops in the lira.

The bank will auction non-deliverable forward contracts to give currency protection without eating into official reserves, the central bank said. The forward contracts were originally reported by state news agency Anadolu, which interviewed Deputy Governor Erkan Kilimci.

The new hedge is being offered amid new declines in the lira, which lost more than 16 percent of its value against the dollar over the past 12 months, the worst performance among 24 emerging market currencies tracked by Bloomberg. Last week, policy-makers changed reserve requirement rules and allowed exporters to repay foreign currency loans in liras through measures that could inject as much as $6.4 billion to the market by February.

For more on recent central bank steps to support the lira, read: Turkey Boosts Foreign-Exchange Liquidity After Lira’s Plunge

The contract could boost foreign exchange supply but it shouldn’t turn into a monetary policy tool, said Bora Bocugoz, executive vice president for treasury and financial institutions at Denizbank AS in Istanbul.

“This will provide an important FX risk hedge opportunity for companies with long-term FX positions,” Bocugoz said. “If this product turns into a monetary policy instrument in the future, its efficiency could weaken as it would result in unwanted speculation.”

The lira erased gains after Anadolu’s original report and was 0.4 percent lower at 3.8801 per dollar at 12:35 p.m. in Istanbul. The yield on Turkey’s 2-year lira bonds rose 5 basis points to 13.6 percent, according to data compiled by Bloomberg.

The bank didn’t give details on the offerings. Commercial lenders will participate in the auctions, bidding on size and price, and offer the forward contracts to their clients, it said.

“There will be a market with depth for institutional companies against foreign exchange risk,” the regulator said. “Unlike customary forward FX transactions, there is no exchange of principal amount at the time of the transaction or upon maturity.”

Understanding companies’ exchange risks and how to hedge against them is key to both price and financial stability, Kilimci told Anadolu. The central bank is still in the process of developing a mechanism to track companies’ foreign currency income and liabilities, he said, a plan Bloomberg first reported in June.

Turkey’s reliance on external funding is among its economy’s biggest weaknesses, and the government and central bank have rolled out a string of policies to bolster the lira and reduce private companies’ demand for dollars since the currency tumbled to a record low against the dollar in January.

To contact the reporter on this story: Onur Ant in Ankara at oant@bloomberg.net.

To contact the editors responsible for this story: Alaa Shahine at asalha@bloomberg.net, Amy Teibel, Stuart Biggs

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