Turkish central bank governor's statements about reserves raise questions

On April 23, Turkish central bank governor Şahap Kavcıoğlu made statements about the state of central bank reserves in a joint broadcast of news networks CNN Türk, TRT Haber and A Haber.

Kavcıoğlu announced the central bank's gold and foreign exchange reserves live on air, claiming that the bank had 720 tons of gold in its coffers.

“There have been 120 tons of gold in Turkey for years,” Kavcıoğlu said. “Turkey currently has 720 tons of gold in its central bank reserves. All of Turkey’s gold is now in the Central Bank. We now have $90 billion in gross reserves.”

A ton of gold is worth 51.5 million today. The value of 720 tons of gold is $37.8 billion.  Gross reserves are hard currency holdings.

“The figures I gave are clear and correct,” Kavcıoğlu insisted.

And they are, by all accounts. But it would appear that Kavcıoğlu has only cited the “assets” part of the balance sheet. The central bank also has liabilities, and he seems to have ignored these in making his statements.

At the time of writing, central bank reserves are unquestionably negative due to massive liabilities, largely through swaps. Goldman Sachs recently estimated that debt at $60 billion, but economist Güldem Atabay, estimates them at negative $48 billion. The difference may be due to the recent sale of gold reserves by the central bank, which appear now to be reduced to 547 tons or $24.94 billion in value.

Turkey sold almost 11.7 tons of gold in February, according to a report from the World Gold Council.

As of April 8, Reuters data sh0wed that the Turkish central bank’s outstanding swap transactions stood at $41.116 billion. The reserves are again, unquestionably in deeply negative territory once the swaps are deducted.

An International Monetary Fund (IMF) report confirms the incidence of swap activities against reserves.

The IMF noted in June 2020 that “outstanding FX and gold liabilities arising from [the central bank’s] financial derivative activities with resident and non-resident banks recorded $55.3 billion, of which $20.1 billion is due in one month”.

This is an important detail, explains economist Mustafa Sönmez as it pertains to sums obtained through currency swaps with foreign central banks and local banking actors. Accordingly, it reveals that more than 60 percent of reserves have been secured through swaps or “financial derivative activities”. 

All of this explains why analysts have expressed outrage and scorn at the central bank’s rhetoric.

“There is no defence for the literally idiotic FX mgmt policy. I don’t think money was stolen just wasted in a simply stupid monetary policy stance that put the very stability of the entire financial system at risk. Agbal knew that, spoke out, + got fired,” said Timothy Ash of Bluebay Asset Management.

What can be done? Attracting foreign investment is critical. But, while the value of the Turkish lira is at record lows - close to 10 to the euro and 8.30 to the dollar at the time of writing - there is little room for action.

Foreign investors might be attracted to invest with interest rates at a high 19 percent, but it’s hardly worth earning liras when they are such low value.

“This means that the government is likely to, once again, try to stimulate the economy by low rate policies,” said Selva Demiralp, director of the Koç University-TÜSİAD Economic Research Forum, in Istanbul.

“Such a priority has a high potential to backfire by causing extreme pressures on the lira and contracting the economy even further,” she said.

“There is now a very real chance that Turkey is heading for a messy balance of payments crisis,” Jason Tuvey, analyst at Capital Economics, wrote in a note.

Foreign investors have lost confidence in the country. Unless there is a serious change of policy by the government, there is little chance of avoiding a crisis in as little as a few months’ time.

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