Türkiye returns a deposit of $5 billion to Saudi Arabia
Türkiye’s central bank has returned a $5 billion deposit to Saudi Arabia, reflecting Türkiye’s confidence in its ability to boost foreign exchange reserves without the need for debt.
The central bank said in a statement that external liabilities have recently improved by about $7 billion thanks to the reduction of deposit balances.
Significant improvements in investor sentiment since the reform of Türkiye’s economic team last year have contributed to increased demand for Turkish assets and stabilized the lira, prompting Deutsche Bank to consider the purchase of lira-denominated bonds as the best investment in emerging markets this year.
This shift allowed the central bank to reduce its foreign exchange obligations in record terms.
The Saudi Fund for Development deposited $5 billion with Türkiye’s central bank last year.
Since local elections on March 31, domestic investors have withdrawn $11.5 billion from government-backed accounts that promised to compensate investors for foreign currency losses.
In contrast, foreign portfolio inflows into Turkish equities and government debt reached $18 billion.
According to experts, the Turkish central bank’s move is a sign of confidence, as the country is doing a much better in terms of secure positive net reserves.
According to Bloomberg Economics who estimates that the Turkish central bank added about $80 billion to its reserves in the second quarter alone, and as of early July, net reserves, excluding swaps with commercial banks, were about $15 billion, compared to minus $60 billion before local elections in March.
The Turkish Central Bank Governor Fatih Karahan said in an interview this month with Bloomberg, “We’ve largely eliminated swaps with local banks and are now reviewing deposit agreements with our international counterparts”.
However, the potential breakup of transfer trading operations (interest trading) or renewed domestic interest in foreign currencies may pose challenges to the monetary authority.
Transfer trading refers to the practice of borrowing in places where interest rates are relatively low, and then converting those funds into instruments in currencies that offer higher interest rates, such as the Turkish lira.
The attractiveness of this strategy depends on the level of interest rates and the stability of the currency.
The Turkish central bank, which set the benchmark interest rate at 50%, has pledged to maintain a tight monetary policy to curb inflation and maintain the attractiveness of the local currency assets.
According to Bloomberg Economics estimates, about $20 billion of the increase in foreign reserves may be related to transfer trade flows.
