News ID: 322610
Published: 0354 GMT June 27, 2022

Turkish lira rally reined in as investors question lending curbs

Turkish lira rally reined in as investors question lending curbs

A money changer holds Turkish lira banknotes at a currency exchange office in Ankara, Turkey.

The lira firmed versus the dollar on Monday then lost some of its gains as investors raised questions about Turkey's latest move to boost the currency by restricting lira lending to many companies with more than $1 million in forex.

The lira was as much as 6% higher in early trade, building on a rally that started on Friday evening in response to the step by the BDDK banking watchdog, Reuters reported.

But by 0943 GMT it stood at 16.726 versus the dollar – 1.6% stronger than the close on Friday.

The BDDK or Banking Regulation and Supervision Agency said that if companies have more than 15 million lira ($900,000) of forex cash assets, and if that exceeds 10% of total assets or annual revenues, they will not be allowed to receive new lira loans.

Some analysts said the step could boost the lira by forcing many large- and medium-sized companies to convert forex assets to lira. But they said that would not address the currency's underlying problems.

"Bad policy. Desperate really. Short termism and actually capital controls, whichever way you look at it," Tim Ash, a strategist at BlueBay Asset Management said.

"Does it really change the underlying demand by Turks for FX? Hardly, that is driven by high inflation, low policy rates and a fundamental lack of confidence in policy," he added.

The new rule was the latest in a raft of government and central bank measures since a historic currency crash in December sent inflation soaring. The BDDK said the move would strengthen financial stability.

The lira tumbled 44% against the dollar last year as a central bank easing cycle left its policy rate at 14%. Annual inflation has since surged, hitting 73.5% in May. This year, the lira has weakened a further 21%.

Concerns over policy, depleted official reserves, a rising current account deficit and some investor and saver fears of capital controls remain sources of pressure on the lira.

Turkey's five-year credit default swaps (CDS) eased 8 basis points (bps) from Friday's close to 780 bps, the lowest since June 10.

Banking stocks in Istanbul were 1.8% weaker after the move, while the main share index was down around 1%.

Savings of individuals and companies in Turkey have increasingly shifted to foreign currency since 2018 for various reasons, notably the negative real return on the lira.

Bankers said that after the BDDK move banks were waiting for the situation to become clear and looking into the details before proceeding with loan disbursement.



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