Turkish President (and raving lunatic) Recep Tayyip Erdogan is furious on Thursday.
“[We are] under attack by Western media outlets which portray Turkey’s economy as collapsed, finished”, he said, during a televised speech from Ankara. He continued:
Oh Financial Times! What do you know about Turkey which hosts 4 million refugees? How many refugees are there in your country?
“Whatever the Financial Times writes, our situation is clear”, Erdogan went on to proclaim.
Actually, the “situation” is the furthest thing from “clear”, which is precisely the issue.
On Wednesday, FT published a piece accusing CBT of inflating net reserves with swaps. More simply, FT alleges that were it not for borrowed money, the country’s reserves would be less than $16 billion, as opposed to the reported $28 billion earlier this month. Apparently, CBT’s borrowing from banks reached as high as $13 billion by April 8, which is odd because that figure never rose above $500 million from January to the end of March. For the first time ever, CBT admitted that currency swaps “may impact reserve figures”, but insisted that the way those are accounted for is in compliance with “international norms”. Bloomberg data shows the outstanding total of short-term transactions stood at $12.7 billion as of April 12.
The problem with the above should be immediately obvious. For one thing, it suggests Turkey’s capacity to defend the lira in a pinch is limited. Beyond that, net reserves below $16 billion would appear to suggest Turkey can’t even cover one month of imports, a revelation that would not please a market that’s still on edge after the draconian FX crackdown that preceded last month’s local elections.
If Turkey is doing what FT alleges (and they probably are), then those aren’t really CBT’s reserves. It’s just pledged lending. “If reserves are increasing only because of FX swap transactions, then it suggests that reserves failed to increase despite better current account and increased issuance in the FX market and that there is a persistent demand for FX reserves, which also then shifts market attention to the financial account side of the balance of payments”, one EM strategist from Legal & General Investment Management in London told Bloomberg on Thursday.
Meanwhile, CHP’s Ekrem Imamoglu finally assumed office as Istanbul mayor after weeks of tension that found AKP rolling out all the usual allegations of fraud in an effort to effectively nullify the election. That was good enough to give the lira a boost on Wednesday, but the reserves story quickly negated the good vibes.
The currency is now at the weakest levels since October.
Turkish stocks fell Thursday for the fifth session in seven, snapping a two-day winning streak. Banks led losses. As a reminder, the Borsa Istanbul erased its YTD gains ahead of the municipal vote.
Next week, the country’s election board will rule on AKP’s objection in the Istanbul vote. The body could, theoretically, overturn the ballot, which Erdogan initially tried to undercut by demanding a re-vote after a bid to close the gap with a partial recount fell short.
And yes, that’s all just as silly as it sounds. Erdogan simply isn’t willing to accept the result. If he somehow manages to pressure the election board into calling for another vote, it seems highly likely that the re-do will be rigged, reminiscent of November 2015, when Erdogan engineered a farcical ‘re-run’ after not getting the result he wanted that June.
With last year’s lira collapse still fresh in the minds of the market, it wouldn’t take much in the way of political turmoil to start tipping dominos again and if it’s true that CBT is fudging the reserve figures, that’s just gas on the fire.
All of this as the S-400 soap opera continues to sour relations between Washington and Ankara and amid ongoing concerns about the economy, which sank into its first recession in a decade in Q4.