Shock of Lira Crash Pushes Turks to Cushion Savings With Dollars

(Bloomberg) -- The stakes in Turkish elections this month could hardly be higher, if the behavior of local investors is anything to go by.

Households and businesses scooped up another $4 billion of hard currency last week, the most since 2012, driving their holdings to a fresh record. Fueling the rush for foreign tender is inflation, which is eating away at their lira savings, and concern the government will double down on policies geared toward priming growth rather than reining in prices after municipal elections on March 31.

With the economy in its deepest recession since the global financial crisis there’s a risk the authorities may revive a growth-at-all-costs approach that compounded the lira’s depreciation last year. The currency has already been drifting lower against the dollar, falling almost every day this month as it extended its losses in March to more than 2 percent.

“If other measures to underpin credit growth fail, ultimately the suspicion is that the central bank will be forced to ease policy, almost regardless of inflation,” said Henrik Gullberg, a strategist at Nomura International in London. “Needless to say maybe, but geopolitical uncertainty means monetary policy needs to overcompensate.”

Shock of Lira Crash Pushes Turks to Cushion Savings With Dollars

Easing Bias

So far, the central bank hasn’t indicated it will veer from its hawkish stance, signaling it won’t cut interest rates sooner than is warranted. While economists expect 450 basis points of cuts through the end of the year, many traders see the central bank holding off until June.

Still, the memories of last year’s currency crash are fresh, and they stand in the way of a wholesale shift into lira savings. The rout triggered by a diplomatic showdown with the U.S. in August, the worst since the lira was floated in 2001, was compounded by a reluctance to increase borrowing costs. Weeks later, the central bank hiked rates by 625 basis points.

Adding to Turks’ demand for dollar are signs the government is leaning on lenders to spur loan growth, pushing deposit rates to levels that barely compensate savers for consumer prices running at four times the official target.

In an effort to lessen the blow of inflation on the poorer sections of Turkey’s 82 million population that form a bulk of the ruling AK Party’s base, the government has now turned to less orthodox measures to tackle price increases.

Municipalities in Turkey’s largest cities are selling vegetables and fruit at discounted prices, effectively sparking a price war with local retailers and wholesalers. Authorities have resorted to threatening and fining shops they deem to be profiting unfairly by inflating prices.

For local investors to change their stance and ease off their demand for foreign currency, they “need to see a longer period of a stable to stronger lira,” Nomura’s Gullberg said. “For that to happen inflation will have to come down in a credible and sustainable manner, and not by forcing retailers to lower prices.”


While a creeping dollarization of the economy has plagued the nation for decades, dollar deposits now account for almost 50 percent of the total in Turkey, the highest level since at least 2006.

“Unless the central bank breaks with the past and brings down inflation on a sustained basis, deposit dollarization is likely to become more widespread and risks in local banks will intensify,” said Jason Tuvey, a senior emerging-market economist at Capital Economics in London.

Turkish residents boosted their foreign-currency savings for 10 weeks running through March 15, according to the latest central bank data. They now hold around $176 billion worth, and the buffer may help shield the corporate sector, which is bogged down by a foreign currency debt pile equivalent to a quarter of gross domestic product.

Still, last year’s crash “severely undermined confidence” in the lira, said Piotr Matys, a strategist at Rabobank. “Once confidence is lost, it takes a lot of time to restore it.”

©2019 Bloomberg L.P.

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