The Turkish government and central bank have taken the first step towards unwinding foreign exchange protected savings accounts, a controversial $125 billion scheme that is designed to protect savers against falls in the Turkish Lira. The move comes at a time when Ankara is increasingly pivoting away from the unorthodox monetary and fiscal policies pursued by President Erdogan, policies which have stoked an inflation crisis in the country and caused the lira to drop to record lows.
FX protected savings accounts were launched in 2021 and are widely seen as one of the pillars of Erdogan’s previous, unorthodox economic policies. The accounts worked by the government compensating individuals and businesses whenever the lira fell against the dollar and euro. The idea was to stem further capital outflows and incentivise Turks to keep their savings in lira, despite volatility on foreign exchange markets and currency depreciation.
It is estimated that Turkish banks now hold around $125 billion in protected deposit accounts, meaning the government’s finances are highly exposed to any movements on lira markets. Indeed, the accounts have cost the government approximately $20 billion in 2023 alone given the lira has posted declines of over 30% against the greenback.
The central bank has now announced that it will be slowly unwinding the scheme as it attempts to normalise fiscal policy and bring Turkish monetary policies in line with developed markets. Hafize Gaye Erkan, the orthodox governor and former Goldman Sachs banker, has said that banks will now be encouraged to convert FX protected accounts back into regular savings accounts. Timothy Ash, an economist focusing on emerging markets, said simply “this has to be done – the scheme is just too costly and risky.”
Daglar Ozkan, an economist at a prominent Turkish investment bank in Istanbul, told Disruption Banking that the move is an encouraging sign of policy normalisation but that it does not go far enough.
“Banks will now be punished if they do not manage to convert a proportion of FX-protected deposits into regular domestic currency deposits,” he said. “This seems like a disguised “tightening” [of monetary policy] but it’s not strong enough – we will have to look at how fast regular deposit interest rates now increase.”
Ozkan also suggested that the Turkish central bank, at least for now, will only encourage the highest earners to move away from FX protected accounts. The rationale is likely to be reconciling the economic necessity to start winding down an unsustainable scheme with the desire to protect lower earners from further depreciations of the lira. “Our guess right now is that high-wealth individuals will be targeted for account conversion,” Ozkan said. “We don’t expect to see a rise in deposit rates across the market.”
Markets appear to have had a mixed reaction to the central bank’s announcement on Sunday. The lira has traded stably against the dollar, albeit posting a small decline since the start of the week. The Borsa Istanbul Index is also down slightly in this week’s trading but has rallied almost 40% since the start of the year. Yields in the five year credit default swap markets, the best gauge of risk in Turkish markets, are down over 3% this month which implies a lower perceived risk of default.
While there will inevitably be turbulence on markets as Turkey seeks to drag itself back in line with the rest of the world, the commitment to ending FX protected accounts is likely to contribute to greater optimism regarding Turky’s future performance. Earlier this month, the global credit ratings agency Moody’s suggested that Ankara could be on course for a ratings upgrade, saying “the shift towards more orthodox, rules-based, and predictable policymaking is credit positive, and comes earlier than w had expected.”
Turkey still has work to do to regain the trust of foreign investors – but moves of this kind are likely to contribute to growing confidence in Turkish markets.
Author: Harry Clynch
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