Turkey presents a new economic model and signals new measures to consolidate the lira

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Treasury and Finance Minister Nureddin Nebati presented Turkey’s new economic path to investors in London, pledging to keep the exchange rate stable, bring inflation down to single digits and hold dollarization to distance.

Addressing investors and bankers in a series of meetings during his first trip abroad, Nebati also said Ankara would announce a new program this weekend to incentivize households to convert their assets. in gold in Turkish liras.

Nebati met with nearly 100 top executives on Monday and Tuesday to present Turkey’s new economic model based on low interest rates.

President Recep Tayyip Erdoğan has endorsed a model based on lower borrowing costs, which he says will boost production, employment and exports, and will also eventually help Turkey solve its chronic current account deficit problem. and will help stabilize the Turkish lira.

To support this momentum, Turkey’s central bank has cut interest rates by 500 basis points since September to 14%, before pausing the easing cycle last month.

In a press conference held at the Turkish Embassy in London, Nebati said that during the meetings he highlighted Turkey’s dynamic productive capacity, strong growth, sound public finances, firm banking sector. and its low debt.

Stating that inflation in the country is temporary, he said that communication with bankers and investors will be regularly maintained.

Under the new economic policy, the government aims to dampen inflation by creating a current account surplus.

Turkey’s annual inflation hit a 20-year high of 48.69% in January, according to official data.

The lira has been broadly stable year-to-date after falling 44% in 2021. It hit a record low of 18.4 against the US dollar in December, but rebounded after Erdoğan announced a program to stimulate lira deposits by protecting them. against depreciation.

The move had helped the lira recover strongly to just over 10 and then stabilize at current levels at just under 14 to the dollar.

Timothy Ash, senior emerging markets strategist at London-based BlueBay Asset Management, welcomed Nebati’s two-day visit to London on Tuesday.

“Nebati has done a decent job in London,” said Ash, who met the minister in London.

Claiming that Nebati was well prepared and good at marketing and selling Turkey’s history, Ash said on Twitter: “(He) was open, welcoming to foreign capital, it was clear that capital controls are not on the agenda.”

“The key is the exchange rate peg – their line is that the December selloff was abnormal and extreme, and where we are now the currency is more defensible,” he was quoted by Reuters.

Ash said Nebati described inflation as a major challenge and agreed it was “the biggest problem they have”.

“The message was very clear: we are going to keep the exchange rate stable … and that will help the whole path of inflation to drop precipitously and allow us to reach single-digit inflation early next year,” he said. said another investor. on condition of anonymity.

Gold Savings Program

Nebati flagged new financial packages to bring gold ‘under the mattress’ into the banking system and was quoted as saying that the government would also announce a new program this weekend to encourage households to convert their holdings into gold in lire.

The term “under the mattress” refers to a long tradition in Turkey of turning to gold to protect wealth and store it at home.

Two investors who attended the meetings said the minister told them about plans to ensure that some of the $250-350 billion in gold held by Turkish households would end up in the national savings system.

“The important thing for us is the stabilization of exchange rates. With this package, we will have put the gold under the mattress in the system, which is estimated at around 5,000 tonnes of gold equivalent to 250 (billion dollars) – 350 billion,” he said, adding that more details will be announced soon.

Part of this sum will support the Central Bank of the Republic of Turkey (CBRT) and meet foreign currency needs, he noted. “But more importantly, it will strengthen the Turkish lira, which is the basis of our model.”

“They will be making announcements this weekend on how to convince people to give up their gold holdings – that’s a huge sum in Turkey,” one investor said.

“They want this gold back in the banking system, this will certainly help expand the monetary base in Turkish lira terms,” the investor added.

Investors said Nebati did not provide any additional details on how the program works.

Turkey introduced a program in December to encourage residents to convert their foreign currency savings into lira under a deposit protection scheme, compensating depositors for any loss due to the depreciation of the lira.

Since the announcement, the government has extended the program to business accounts. The CBRT also said that exporters would be required to exchange 25% of their foreign currency earnings into lira.

Regarding the newly introduced exchange-protected deposits, Nebati said tools aimed at boosting the value of the lira should not be considered one-time use.

“We started with individuals, we added legal persons. The central bank also allowed Turkish citizens living abroad to benefit from this instrument,” Nebati said.

The volume of deposits under the lira protection program topped TL 312 billion ($23 billion) on Monday, Nebati noted.

“While it (exchange-protected deposits) started with 10% of total deposits in the early days, the figure has grown to 45%,” he said.

“Citizens are showing interest,” he added.

Nebati also said revenue from the key tourism sector is expected to recover to $34.5 billion this year. Revenue doubled to almost $25 billion last year, reflecting a recovery from the initial wave of COVID-19 pandemic measures in 2020.

The figure was still well below the all-time high of $34.5 billion set in 2019, before the pandemic hit. The number of visitors, including Turkish nationals living abroad, jumped by more than 88% to reach more than 30 million in 2021, according to data from the Ministry of Culture and Tourism.

Loan

Investors are also eyeing Ankara’s overseas borrowing plans.

Two sources familiar with the plan said Turkey was preparing to sell a dollar-denominated sukuk, its first sale of dollar bonds since September. A source said HSBC was among the banks hired for the deal.

The Treasury did not immediately comment on the possible sale. According to Refinitiv data, Turkey is due to repay a $2 billion Eurobond on February 21 and a $1.1 billion domestic bond on February 25.

Nebati also told investor meetings that the government had had very productive talks with Abu Dhabi, Saudi Arabia and Israel in recent days, and that swap deals were being worked out. He declined to give further details.

According to analysts’ calculations, based on analytical central bank balance sheet data, net and gross reserves rose by $5 billion to $6 billion last week.

Bankers said the rise could be due to the bank’s $4.7 billion swap deal with the United Arab Emirates (UAE) and a new requirement that 25% of exporters’ foreign exchange earnings must be sold to the bank.

Swap agreements with foreign central banks help strengthen reserves. From January, the central bank conducted a more active foreign exchange reserve policy.

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