Unraveling FX Reserves: A Call for External Debt Strategy and Monetary Policy Normalization
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FX and External
Debt strategy Under the existing CBT policy with indirect FX interventions and regulations to control locals' FX demand, gross FX reserves have been under pressure since the beginning of this year. Gold reserves have also been on the decline lately, as the CBT directly matches gold demand given import restrictions introduced in February. Total reserves are around the US$100bn threshold, though, excluding swaps with banks and other CBs, the CBT’s net reserve position is -US$61bn, an all-time low. Given this backdrop, there is a consensus that points to a normalisation in the conduct of the monetary policy with the narrowing corridor for muddling through.
In this regard, the signals for a shift towards more conventional monetary policy have supported the sentiment in the days following the elections and any policy action after the new economy post appointments will be watched closely. Valuations for Turkey’s Eurobonds have gone almost full circle over the past year, with a sharp sell-off after the first-round election results followed by a more recent recovery. Spread levels relative to single-B peers and the pickup over higherrated BB sovereigns are now at the tight end of their range for the past year.
In the near-term, concrete steps towards a shift to more orthodox economic policy is likely to be taken positively by the market on the back of recent market-friendly rhetoric, and technical factors should remain supportive given a persistent local bid for short-dated paper and light positioning from international investors. However, we remain cautious on the medium-term prospects for a durable return to orthodox policy and have concerns over the recent drain in FX reserves and spillover effects from currency pressures that will be difficult to solve.
FX – spot vs forward and INGF
CBT funding
