LONDON- Turkey’s paltry foreign currency reserves leave it vulnerable to a financial shock in the wake of its military push into Syria, with markets concerned that geopolitical tension and sanctions over the incursion could lead to a reprise of its 2018 lira crisis.
A deal between Ankara and Washington to pause military operations in Syria has come as a respite for Turkish assets, which have been reeling since the incursion started nine days ago.
Yet White House sanctions on a number of Turkish ministers and officials remain in place, a U.S. court case against state lender Halkbank for taking part in a scheme to evade U.S. sanctions on Iran continues, and a host of European countries have taken steps to limit arms sales to their NATO ally.
And with a U.S. push for more sanctions going ahead full steam – including potential curbs on Turkey’s sovereign debt – many investors fear the market euphoria may be short-lived, with Ankara’s ability to shield its currency from ruckus moving into sharp focus again.
Data published by the central bank on Thursday showed net foreign currency reserves stood at $36.77 billion as of Oct. 11. That’s not much to defend the currency with if it begins to weaken.
“Net reserves are negligible in Turkey,” said Tatha Ghose, FX and emerging market analyst at Commerzbank in London.
“We assume that the Turkish central bank has no real reserve resources to fight lira weakness if and when it arises,” Ghose said. Even countries such as Russia and China with their much greater reserves have found their forex firepower eroded quickly once pressure mounted, he added.
The lira’s history is littered with examples of tension with Washington dramatically amplifying exchange rate moves, while inflationary pressure – and its implications for central bank efforts to lower interest rates – are ever present.
Yet having just emerged from a 2018 economic crisis and a near 50% collapse in the lira’s exchange rate fueled by a stand-off between Washington and Ankara over American Pastor Andrew Brunson, markets are trying to gauge just how much of a financial buffer the country has to stave off a repeat.
Foreign reserves are crucial to a country’s ability to support its currency as well as meet its import bills and external debt repayments.
Questions over its FX reserves roiled markets in the spring after a report that short-term borrowed money – or swaps – had become a substantial part of Ankara’s war chest.
Some investors and economists are puzzled about the best way to measure net reserves and how the central bank accounts for swaps in its calculations.
While the latest central bank data showed net forex reserves were slightly below $37 billion, Oxford Economics/Haver calculated that actual usable forex reserves taking into account beefed up gold reserves and commercial banks’ forex requirements stood at just $29 billion as of the end of August.
S&P Global Ratings, meanwhile, said on Wednesday that Turkey’s net foreign exchange reserves were “limited”. It added that “under a stress scenario, the public and private sectors may even be forced to compete for foreign-exchange liquidity.”
The central bank did not immediately respond to a request for comment.
Having recovered in recent weeks, analysts say Turkey’s FX reserves could come under pressure again as Ankara tries to shore up the lira. Traders say state banks have been intervening to cushion the currency’s fall by selling billions of dollars since early last week. One estimate was that some $2 billion was spent on Monday alone, even though the lira slid to its weakest since May.
Officials at the central bank were not immediately available for comment.
Much like in previous turmoil, economists say Ankara’s focus has been on immediate damage control. Investors expressed doubt about how effective that could be this time round.
“If it comes down to trying to support the currency via intervention Turkey will not be successful,” said Jon Harrison, managing director emerging markets macro strategy at TS Lombard.
He said while initial U.S. sanctions had been soft, the domestic pressure was ramping up on President Donald Trump to be tough on Turkey.
“They know they don’t have the reserves to maintain the lira at a particular level and if they do they would only be able to do that for a few days.”
The strength of domestic demand for hard currency has become a gauge of faith in the authorities’ ability to manage the lira and the country’s finances. As households and businesses have shifted savings into hard currency, dollarization has climbed to record highs, providing little reassurance.
One saving grace for Turkey is its current account balance. Following years of hefty current account deficits, last year’s lira crisis tipped the country into recession – but it also closed that gap, reducing the need for foreign currency inflows to stabilize the exchange rate, at least in the short term.
Nevertheless, as the country has to import nearly all of its fuel and gas as well as lots of machinery, steel and vehicles, its reserves are also a gauge of its ability to cover its foreign buying in the event of a crisis or seizures of its overseas finances.
The International Monetary Fund estimates Turkey’s reserve import cover ratio stands at about five months – above the fund’s three months safe minimum though well below the around 15 months fellow emerging markets such as Russia, China and Brazil enjoy.
Turkey’s foreign debt liabilities are also under scrutiny: Over the next 12 months, some $180 billion of debt is maturing of which some $75 billion faces a higher rollover risk. The rest is made up of trade credits as well as lira and FX deposits by non-residents, according to the Institute of International Finance.
More pressure on the lira could hurt companies’ ability to pay back or roll over those dues, analysts said. Any potential sanctions restricting dollar funding for companies would be a game changer, said Nikolay Markov, senior economist at Pictet Asset Management.
“If that happened, Turkish companies might face liquidity shortages, which would then require the central bank to step in,” said Markov.