Turkey weighs inflation-protected lira bonds to bolster currency: Report

Turkey is considering a range of new Turkish Lira-based financial products that the government would guarantee against inflation losses, Nikkei Asia quoted a top government official as saying.

“The Treasury and Finance Ministry is working on inflation-indexed instruments,” said Göksel Aşan, the head of the Presidential Finance Office, according to a report published on Jan. 1.

“I do not think that it will be another bank deposit instrument, which would mean competing with the new forex-indexed lira deposits,” he said, hinting at bonds without specifying.

These would follow up on a scheme launched on Dec. 21, 2021, to protect local-currency bank deposits against losses from foreign exchange fluctuations.

Aşan said more than 60 billion liras ($4.5 billion) have accumulated in the new forex-indexed lira deposit accounts so far.

The announcement triggered a massive rally by the lira, pushing it from 18.3 to the dollar to 10.2 at one point. The Turkish currency has more recently traded at around 13.4, softening for a fifth straight day on Dec. 31, 2021. The lira closed 2021 down over 40 percent, making it the worst-performing emerging-market currency.

Aşan also suggested that work is underway to bring part of an estimated 5,000 tons of gold and gold jewelry into the financial system by introducing gold certificates to be exchanged with physical gold. These gold items, stashed away in homes and bank vaults, are estimated by the government to be worth some $280 billion.

Data from the Turkish Central Bank shows that total forex deposits held by individuals and institutions, such as companies, did not decrease over a week to Dec. 23 and instead hit a record high of nearly $239 billion.

But Aşan expressed satisfaction with the response to the new products.

“I personally expect that the new deposit instruments will collect 150 billion liras [$11.3 billion] to forex-indexed lira accounts in a month, while I also expect an additional $5 billion to be exchanged back to the lira from standard forex deposit accounts in the same period,” he said, suggesting a sum of $16 billion at the current exchange rate.

The Turkish Central Bank has slashed its policy rate by a total of 5 percentage points since September 2021, lowering the benchmark rate to 14 percent, even while annual inflation hit 21 percent in November 2021. The move pushed investors away from the deeply negative lira deposit rates and toward parking their assets in instruments ranging from forex to gold and even cryptocurrencies.

Asked about the potential cost that the government may have to shoulder through the deposit guarantee should the lira depreciate much further against the dollar, Aşan said the worst-case scenario for the first three months might see a burden of 20 billion liras. But he reiterated that “the lira rate will be stabilized within weeks.”

“My personal expectation is that the lira is going to stabilize somewhere quite higher than 10 liras [to the dollar] and later move in line with inflation,” he said.

He expects that from April, Turkey will post a current-account surplus and that with the arrival of the tourism season in the summer, foreign-currency income will increase and help Turkey close the year with a current-account surplus.

In an interview with Bloomberg HT, Aşan predicted that the inflation rate could plunge into the negative territory in January.

He expects inflation to close the year below 17 percent. Market analysts expect a median of close to 23 percent annual inflation for the next year.

In Istanbul, home to around a fifth of Turkey’s population of 84 million, retail prices jumped 9.7 percent month on month in December 2021 for an annual rise of 34.2 percent, the Istanbul Chamber of Commerce (ITO) said.