Foreigners with ‘hottest of hot money’ may exit Turkey in a flash - columnist

Turkey’s government has long opposed the prevalence of so-called speculative “hot money” that enters the country periodically to take advantage of rising interest rates.

The cash coming to Turkey has now become even hotter and its quality has deteriorated as foreigners enter the local market through cross-currency swaps, said Alaattin Aktaş, a columnist for Dünya, Turkey’s main financial newspaper.

Turkey’s new economic management team says it will not battle foreign investors and interest rates will be as high as conditions require. They also say they will do whatever is needed to attract investment to the country, words that are music to foreigners’ ears, Aktaş said.

Turks have long complained about “hot money” that enters the debt market from foreign investors, who then force up interest rates only to exit as quickly as they came, leaving locals with high interest payments to deal with. But now that cash from abroad is coming by way of cross-currency swaps with extremely short maturities and low risk, a so-called “hottest of hot money”, Aktaş said.

“If the lira continues to gain in value, foreigner's profit increases accordingly. Even if the lira remains unchanged, profit levels are really good,” Aktaş cited one banker as saying.

“The only thing that scares foreigners is that the currency suddenly starts to lose value… That is why we should closely monitor who has been trying to create a public opinion that the lira will gain more value," the banker said.

The central bank does not disclose the amount of foreign currency swaps conducted offshore, therefore rough estimates are made one way or another, Aktaş said.

“The latest estimates are that there is a swap inflow of around $11-12 billion in November and December” while foreigners' purchases of stocks and bonds total $4 billion, he said.

Aktaş said he estimated that around $10 billion of the inflows have been bought by Turkish citizens, while the remainder has been used by state-run banks to close their open foreign exchange positions.

While foreigners have been pushing the argument that the lira will strengthen further, Turks are not buying their story, Aktaş said. They are staying away from the Turkish lira and buying foreign currency even after the average compounded interest rates on three-month deposits rose by around 5 percentage points to 18 percent in two months, he said.

Aktaş said Turks’ holdings of foreign currency deposits increased by about $20 billion in the first 10 months of last year. They grew by another $10 billion since Nov. 6, when President Recep Tayyip Erdoğan set about revamping his economic team, even as interest rates climbed, he said.

The lira hit a record low of 8.58 per dollar on Nov. 6 and then rallied to about 7.3 against the U.S. currency. Turks are now seeing the dollar as cheap and buying it, he said.

The lira dropped by 1 percent to 7.44 per dollar on Monday.

Foreigners, seeing that there is money to be made, are applauding the government’s statements and pledges of more economic reform, Aktaş said. But Turks are far more cautious and have focused on collecting foreign exchange, he said.  

“Foreigners have entered the market with swaps and it’s so easy for them to leave… the maturities are short and they can pocket their gains and leave Turkey at a moment’s notice,” Aktaş said.