Turkey dug deep into reserves to keep lira stable through quake

Turkey’s central bank used $7 billion of reserves in the last two weeks to help steady the lira in the aftermath of devastating earthquakes, and reserves could remain under pressure in the weeks ahead, bankers said.

The worst disaster in Turkey’s modern history killed tens of thousands and levelled areas of the south, temporarily closing the stock exchange.

But in foreign exchange (FX) markets, the lira has shed only 0.2 per cent versus the US dollar since the initial quake on Feb. 6.

Central bank data show FX reserves dropped by $4 billion to $125.6 billion in the week after the quake. Calculations from three bankers show they dropped another $3 billion last week.

The central bank declined to comment.

The bank has balanced the FX market by “channelling its new forex revenues, especially from exports, to the market for a long time now,” said a trading desk manager at one bank.

“This (tapping reserves) cannot be sustained for a long time since the reserve adequacy is low. So I expect the continuation of the steps to reduce the foreign exchange demand,” the banker added.

Dipping into reserves has been a regular feature of the government’s unorthodox economic policy in recent years, especially since a historic currency collapse in late 2021.

The central bank replenishes its reserves in several ways, including requiring exporters to sell a portion of revenues to it, and urging companies and individuals to convert hard currencies for FX-protected lira deposits, or KKM.

Authorities took several steps to cool demand for FX after the earthquake, such as urging banks to conduct derivative transactions on Borsa Istanbul, and widening the spread in FX and gold trades.

The bankers said the central bank would remain under pressure to tap reserves and keep the lira stable in the short term. Flows of international aid will help ease the pressure, they said, requesting anonymity due to sensitivity around discussing state policy.

Wall Street bank JPMorgan estimated the quake’s direct damage to buildings and infrastructure was $25 billion and said “international aid can compensate for the pressure on” lira.

Turkish authorities have been trying to keep the lira steady as one of several moves aimed at easing the way for the central bank to slash rates, even as inflation soared to a peak above 85 per cent last year.

The bank is expected to cut its key rate by another 50 basis points to 8.5 per cent on Thursday, according to a Reuters poll.