Turkey dials up the pressure on banks as lira slides

Turkish authorities have raised the pressure on the country’s banks to limit corporate clients’ purchases of foreign currency in an effort to halt a renewed slide of the lira.

Bankers in Istanbul, Turkey’s financial centre, say that they are facing increased interference from the central bank, with officials probing corporate FX transactions worth as little as $1mn. “Even for $1mn or $2mn, they are calling to check: who is the buyer?” said one senior Turkish banker. “They’re really anxious about the corporate flow.”

The interference is the latest unconventional tactic Turkish officials have deployed to steady a currency that has fallen by 45 per cent against the dollar over the past 12 months, sending inflation soaring.

With the financial sector under strong political pressure from president Recep Tayyip Erdoğan, bankers say they have little choice but to comply with the demands to seek advance approval from the central bank for big-ticket foreign currency purchases. In some cases, commercial banks have been ordered to refuse to facilitate FX purchases for their clients altogether, especially those worth more than $5mn.

While Turkish authorities have repeatedly interfered in the running of banks and corporates in recent years, another banker said that the meddling “has been intensifying” and they were “coming under closer scrutiny”.

A person with close links to the Turkish banking sector said the situation has created anxiety in the business community. “This is leading to worries among corporates that they might not be able to buy as much FX as they need.”

Businesses need dollars and euros for an array of reasons, from paying for raw materials bought from abroad to serving their large foreign currency debt burden. Turkish authorities, however, have raised concerns that some firms are engaging in speculation against the lira.

After four months of relative stability, the currency has lost close to 4 per cent against the dollar since the middle of last week. Foreign currency sales by the central bank and unorthodox policy measures aimed at encouraging savers to park their cash in lira accounts had acted as a sticking plaster during the opening months of 2022.

On Monday, the lira fell through the symbolic threshold of TL15 to the dollar, denting public confidence in a currency seen as a barometer of the health of the broader economy.

The latest wave of pressure on Turkish companies and banks to limit their foreign exchange transactions comes at a time when liquidity in the country’s currency markets is limited, meaning that relatively small purchases of dollars or euros can have an outsized impact.

One of the bankers said officials were “respectful” in their requests and added: “The guys at the central bank know this cannot be a permanent solution.”

The central bank declined to comment.

Erdoğan, a life-long opponent of high interest rates, has used a string of unconventional methods to try to stabilise the lira while maintaining ultra-low real borrowing costs as he gears up for presidential and parliamentary elections that must be held before June 2023.

With the country’s benchmark lending rate at 14 per cent, the real interest rate stands at minus 56 per cent once annual inflation of 70 per cent is taken into account, creating a strong disincentive for holding lira assets.

A widening trade imbalance, fuelled by soaring global energy costs, is another source of weakness and has exacerbated demand for foreign currency.

The central bank — long seen as having insufficient foreign exchange reserves — spent around $24bn on defending the lira in the first three months of 2022, according to Haluk Burumcekci, an Istanbul-based analyst.

A government savings scheme, unveiled in December, has attracted $55bn by promising to protect individual savers and corporates from foreign currency risk if they switch their money to lira. In January, exporters were told that they must sell 25 per cent of their foreign currency revenues to the central bank — a ratio that was lifted to 40 per cent in April.