Turkey Wants to Prevent Virus Loans From Boosting Dollar Demand

(Bloomberg) -- Turkey is trying to stop emergency loans intended to boost its economy during the coronavirus slowdown from fueling demand for dollars instead.

The banking regulator, known as BDDK, is asking lenders to properly investigate new credit requests so that loans do not end up funding anything that’s not essential to companies’ core activities, according to people with knowledge of the matter.

The watchdog sent a letter to some banks asking them to prevent borrowers from using debt to invest in foreign currencies, gold and equities, the people said, asking not to be identified because the information isn’t public. The regulator declined to comment.

The new official guidance comes at a time of weakness for the lira, which is hovering near its lowest levels since a meltdown in the second half of 2018. Over the past year, Turkish authorities have kept a tight lid on lira liquidity abroad to make it more difficult to bet against the currency. But pressure on the lira has shot up since the coronavirus pandemic roiled global financial markets.

Turkey’s state banks meet most of the surge in domestic demand for the greenback, while the central bank’s official reserves decline in the meantime. That’s raising concerns that Turkey may be wasting its ammunition in defending the currency as economic headwinds from the global pandemic mount.

“Even if policy makers can prevent all lira leaks to offshore markets, one should bear in mind that that may not prevent locals’ foreign currency demand,” said Evren Kirikoglu, an independent market strategist in Istanbul.

Increasing Arbitrage

The new regulatory guidance might also put an end to arbitrage opportunities that arose recently as offshore lira interest rates remain high compared to cheap emergency loans banks are advised to provide to corporates to contain the slowdown.

The overnight forward implied yield -- the price foreign funds pay to borrow the currency and sell it in the future -- rose as high as 69% last week, while the central bank’s policy rate stands at 9.75%.

Slowing inflation and falling interest rates haven’t caused a significant change in Turks’ savings habits. As of March 27, residents held $197 billion of hard currency, which made up around half of their bank deposits. The demand for dollars is usually seen as a hedge against inflation and political risks.

©2020 Bloomberg L.P.