TRY: Balance of payments data signal more risk – Commerzbank

The Turkish balance of payments data for March published yesterday are perhaps out of date already, but they brought early warning signs that foreign capital flow could reverse under political or market volatility. During March, Turkey witnessed renewed market volatility triggered by the detention of mayor Ekrem Imamoglu, which drove the lira exchange rate abruptly weaker. In response, the central bank (CBT) took actions which appeared to be decisive, such as raising the effective interest rate, but ultimately relied on mechanisms which we view as a step backward, Commerzbank's FX analyst Tatha Ghose notes.

Significant downside risk for the Turkish lira

"The re-introduction of the 'rate corridor', a distortive and opaque system which had been previously abandoned, is a major point of criticism. This move, coupled with ad hoc FX interventions, and recent re-introduction of soft capital controls such as forced sale of FX by exporters signal a retreat from clear, transparent, and rule-based conventional policies. "

"Even while the effective cost of funding is higher than the benchmark rate, this flip-flopping of monetary policy as soon as a mini-crisis arrived, has fundamentally undermined the beneficial impact of higher rates. The FX interventions are anyway not sustainable. Some reports estimate more than $57bn lost in just six weeks, nearly erasing two years of re-building by CBT."

"Compounding the situation, we now find from March balance of payments data that capital inflow reversed to notable net outflow already within March: portfolio flow and bank sector flow both registered net outflow ($3.6bn each) for the month as a whole. A part of this could be on account of a seasonal lull which follows hectic allocations and fundraising early in the year, but this is not a satisfactory explanation for net outflows – rather, this warns us that April and May could feature a continuation of the trend, which would imply further pressure on policymakers. We see significant downside risk for the Turkish lira exchange rate in coming months."