Turkey begins withdrawing expensive foreign currency deposits
ANKARA (Reuters) - Turkey's central bank on Sunday began unwinding a growing and costly system that protects lira deposits from depreciating exchange rates, marking another move toward more orthodox policies after a move toward raising interest rates. The central bank said in the early hours of Sunday that it had lifted targets applied to banks for certain levels of foreign currency deposit transfers into the lira protection scheme, known as the KKM.
Otherwise, the central bank now wants lenders to set a new target of converting KKM accounts to lira current accounts, in part by discouraging companies and individuals from renewing KKM accounts. According to a separate decree in the Official Gazette, the central bank also increased lenders' minimum reserve requirements for foreign currency deposits, further directing customers to lira current accounts.
President Tayyip Erdogan's government introduced the KKM regime at the end of 2021 to stem the currency's historic slide, which was caused by his unorthodox drive to cut interest rates despite rising inflation. KKM's accounts have since grown to about $117 billion, or 3.1 trillion lire, about a quarter of total bank deposits. This has been supported by a roughly 68% fall in the lira over the past two years.
To cover the cost of KKM write-downs, the central bank paid an estimated 300 billion lira ($11 billion) in June and July, when the lira plunged again. The cost of this month was estimated at 350 billion lire. The lira has been stable over the past month, closing last week at 27.02 per dollar, an all-time low.
After winning re-election in May, Erdogan appointed a new finance minister and central bank chief to shift policy by 900 basis points in rate hikes, and authorities also pledged to ditch dozens of previous regulations to cool inflation and balance the trade deficit. The central bank said the KKM move would "enhance macro-financial stability by supporting lira deposits" and promised more such moves.
For foreign exchange accounts with maturity within one month, the reserve ratio has been raised to 29% from 25%, the official presidency gazette said in a separate overnight announcement. Those under one year have a ratio of 25%.
Hakan Kara, a former central bank chief economist who works at Bilkent University, said the bank was trying to "kill two birds with one stone" by raising deposit rates while limiting KKM accounts. "Official interest rates could have been raised without getting involved in these complexities," he added.
In a bold and strategic economic maneuver, Turkey has taken significant steps to liquidate its expensive foreign currency deposits. The move reflects the country's commitment to improving its financial stability and promoting a favorable investment environment. This article will delve into the implications of Turkey's decision, shedding light on the motivation behind the move and its potential impact on the national economy.
Foreign currency deposits explained:
Foreign currency (FX) hedged deposits have long been a mainstay of Turkey's financial landscape, offering depositors a shield against currency fluctuations. Often preferred by risk-averse investors, these accounts allow individuals and businesses to protect their funds by locking them into a fixed exchange rate, protecting them from potential depreciation of the national currency.
Turkey's Strategic Return:
The decision to begin reducing these costly FX-backed deposits represents a key moment in Turkey's economic strategy. Faced with evolving global economic dynamics and the need to strengthen the local economy, the Turkish government has recognized the importance of reassessing the cost-benefit equation of these accounts.
Motivation behind the move:
Turkey's decision to limit FX hedged deposits was motivated by several factors: Economic resilience: By reducing dependence on foreign exchange deposits, Turkey wants to increase its economic resilience. Over-reliance on these accounts can limit the government's flexibility to effectively manage economic fluctuations.
Stimulating investment: The move is expected to encourage investment in alternative financial instruments such as government bonds or stock markets. This diversification can bring dynamism to the economy and stimulate growth.
Foreign Exchange Management: Shrinking these accounts can help manage a country's foreign exchange reserves more effectively, allowing for a balanced approach to currency stability. Attracting foreign investors: Turkey's commitment to a more open and transparent financial ecosystem may attract foreign investors seeking exposure to the country's emerging markets.
Potential impact:
The decision to limit FX hedged deposits has potential implications for both individual depositors and the economy as a whole: Individuals: While some depositors may face short-term uncertainty, the move will ultimately encourage them to explore investment options that align with their financial goals and risk appetite.
Economic growth: Diverting funds from foreign currency deposits to other financial instruments can pour liquidity into various sectors and promote economic growth and innovation. Currency stability: Turkey's prudent approach to foreign exchange reserve management can contribute to greater currency stability and reduce the risks associated with sudden currency fluctuations.
Turkey's strategic decision to bring back costly FX hedged deposits underscores its commitment to fostering a resilient and diverse financial environment. The move is in line with broader efforts to boost investment, stimulate economic growth and attract foreign capital. Although the transition may present short-term challenges, the long-term benefits to the national economy and financial ecosystem are likely to outweigh them. As Turkey paves the way for a more balanced and dynamic financial future, investors and stakeholders alike can expect an environment ripe for growth and stability.
In a major move to boost its economic stability and boost investor confidence, Turkey recently took the bold step of beginning to cancel costly foreign currency deposits. This strategic decision is expected to have far-reaching implications for the country's financial situation. In this article, we dive into the details of this development and its potential impact on the economy.
For years, the financial sector has struggled with the challenges posed by costly FX hedged deposits. These deposits, which aim to protect customers from currency fluctuations, have often strained national reserves and financial institutions. The high costs associated with maintaining such deposits have not only affected the fiscal health of the government, but have also led to concerns about the sustainability of these arrangements.
Return Strategy:
In order to address these concerns and promote a more stable economic environment, Turkey has embarked on a journey to abolish foreign currency deposits. This strategic decision comes as part of a wider effort to increase transparency, reduce financial vulnerability and create a more attractive investment environment. By phasing out these deposits, the Turkish government wants to strengthen its economic resilience and stimulate confidence in the financial system.
Economic consequences:
The return of costly foreign currency deposits is set to bring several positive economic consequences to Turkey. First, it is expected to ease the financial pressure on both the government and financial institutions, enabling them to allocate resources more efficiently. In addition, the move can potentially attract foreign investors who were previously hesitant due to concerns about the impact of these deposits on the economy.
Moreover, the decision to cancel these deposits underlines Turkey's commitment to structural economic reforms. This commitment may be viewed favorably by international rating agencies, potentially leading to an improvement in the country's credit rating. A higher credit rating could lead to lower borrowing costs, further improving Turkey's economic outlook.
Investor confidence and more:
Investor confidence is expected to strengthen as Turkey begins to reduce expensive foreign currency deposits. The move demonstrates the government's willingness to address financial vulnerabilities head-on and fosters an environment of transparency and stability. Improved investor sentiment could lead to increased foreign direct investment, ultimately contributing to job creation, economic growth and a more vibrant economy.
Turkey's decision to begin canceling costly foreign currency deposits is a key moment in its economic journey. With this strategic move, the nation wants to strengthen financial stability, strengthen investor confidence and attract foreign investment. As implementation progresses, the economic impact of this move will become clearer, setting the stage for a more resilient and prosperous Turkish economy in the coming years.
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