Turks keep most FX since 2001 crisis as confidence lost - FT

Turks are holding more foreign currency deposits than at any time since a financial crisis ripped through the country’s economy in 2001, the Financial Times said citing a report by Renaissance Capital.

Turkish deposit holders were keeping 1 trillion liras in foreign currency at the end of March, exceeding the 993 billion liras they held in the country’s own currency, Renaissance said, according to the FT.

In contrast to today, the financial crisis at the start of the millennium prompted Turkish authorities to seek IMF rescue funds and led to an election victory for Recep Tayyip Erdoğan’s Justice and Development Party (AKP) the following year. Now Erdoğan, the country’s all-powerful president, is rejecting IMF help and his party lost major cities in contentious local elections on March 31.

Charlie Robertson, chief economist at Renaissance, said Turks had lost faith in Erdoğan’s ability to steer the economy. Foreign investors helped prop up the lira at the start of the year, but now those flows appear to have eased, leaving the lira more exposed, he said.

Turkey’s lira dropped 0.3 percent to 6.17 per dollar on Wednesday, extending losses this year to more than 14 percent. The currency dropped 28 percent last year to 5.2887 per dollar after concerns among investors over an overheating economy were exacerbated by a political crisis with the United States, which resulted in economic sanctions.

The flight to dollars in Turkey is taking hold during a painful economic recession and inflation of almost 20 percent. Returns for lira deposit holders, which are marginal, do not provide enough incentive for citizens to stop buying foreign currency, given the lira’s recent track record and the unorthodox economic policies pursued by Erdoğan.

The central bank, which has sold billions of dollars of its foreign currency reserves, which stand at little more than $25 billion on a net basis, in support of the lira, has done little to calm the nerves of ordinary people. Some economists say policy makers now need to raise interest rates from the current 24 percent or risk a further sell-off in the lira.