What would we have included if we wanted to write a guideline for those who have the wish to intervene in foreign exchange rates but who do not have the adequate experience, but at the same time want to do it right? Taking into consideration today’s circumstances in Turkey, I would have listed these:
1. First rule is to look into the currency you are trying to protect, in our case, the Turkish Lira. Does the protective shield, which is the lira interest rates, do they provide adequate protection? Is the lira interest rate high enough? If it does not provide protection then hike the Turkish Lira interest rate.
2. Be transparent; never hide the balance sheets of your central bank. Do not suddenly start at one point hiding the data you have been regularly issuing from the public. Do not hold off-balance sheet assets or liabilities; don’t go that road. Don’t forget everybody is able to see everything. Publish the purchase and sale data of foreign currency even if they are late.
3. Moreover, don’t attempt at balance sheet window dressing. Do not try to show an artificially inflated reserve. Do not go into careless window dressing like swap with nonconvertible or weak foreign currency types and those country currencies that do not have any weight in foreign trade.
4. As long as you are transparent and accountable, you can highlight “all the reserves can be used” emphasis. Do not forget that the intervention power of the central bank starts with its reputation in the market not with its reserve. If a central bank has a low reputation then its reserves become questionable.
5. Check at every level whether the exchange rate increase stems from foreign currency liquidity. If it is due to liquidity then feed the market with foreign currency liquidity. If you are drawing foreign currency liquidity from the market (with such tools as swap, etc.), stop it. On the contrary, lend foreign currency with interbank deposits (depo), give foreign currency to banks with swap and draw Turkish Lira from banks.
6. During a period when the demand for foreign currency increases either because of needs or speculative motives, do not join the market as a “new customer” by collecting foreign currency from the market through swap, do not give the message “I want more foreign exchange reserves” by increasing the limits of banks.
7. If there is a foreign currency liquidity demand based on need despite all the measures and if that exerts pressure on the banking system, then open additional foreign currency sale tenders. Without intervening market rates, you would be supplying liquidity at market rates and increase the foreign currency supply. This in turn would decrease speculative fluctuations.
8. If this pressure stems from economic reasons, then instead of holding the exchange rate, let it go and wait for it to reach a balance.
9. Squeeze the Turkish Lira in your own market conditions. Do not drag it to the field of capital control measures and not to introduce bans in swap, repo, depo and loans with Turkish Liras. This will create the concern that the turn will come to foreign currency restrictions. By making bypasses you would make things worse.
10. If you are in a floating rate regime, do not directly intervene in foreign currency. If you are intervening into foreign exchange markets through several ways and methods while in the floating rate regime then you are announcing the world that you have “fear of floating.” This does not make things better; it makes them worse. If there is a dollarization tendency then you would actually be encouraging the foreign currency ambition of residents.
11. The dilemma of direct intervention for a central bank is that the exchange rate may not fall as you sell foreign currency, it may rise on the contrary. This tells you that you are making a mistake at one point in your monetary policies. For an example to this, take a look on the Central Bank intervention in January 2014. It sold 3 billion dollars but was not able to pull down the exchange rate 1 kurush.
12. With a wrong foreign currency intervention, you would show those in the market who are not even buyers, the demand for purchase. Showing a powerful demand to all players means calling all the sharks to the beach.
13. When should a Central Bank enter the market and intervene in the foreign currency? If the exchange rate margins of the buyer and the seller develop a gap or if one of the sides is not present in the market then it should interfere to make the market function. This actually means extremely volatile market conditions.
14. If you are in the floating rate regime and if you insist you will interfere, do not do it as an adolescent trader by defending the “resistance point,” do it like a central banker. In floating rate regimes, the central banks do not have an exchange rate target. Also, they do not have resistance/support levels in their minds as technical analysts. They do not have “psychological levels.” They do not defend levels.
15. Do not ever let your foreign currency rate policies fall to “second hands.” Do not run it through other organs. This causes loss of credibility. Do not forget that it is one thing that the central bank sells foreign currency, it is another thing when a player in the system to sell it through a broker – even if it is a public bank. Don’t lose your influence. Do not forget selling second hand will cost you more, it will cost you extreme losses in reserves.
16. A central bank executive will never show his or her hand. At a time when the exchange rate is increasing and reaching “overshooting levels” by extreme fluctuations, the central bank signals with a sale of three to five million dollars. To appear and say “I am here” at the right time and the right place is always very effective. Before doing that, the executive would have asked herself/himself “Have I adopted a proper monetary policy to protect the Turkish Lira?” And he or she would have definitely come up with the internal answer “Yes.”
17. Any central banker, no matter whether it is the fixed exchange rate system or the floating rate regime, would definitely know no intervention should be done to defend the exchange rate level. Especially not when on one hand the money is pumped to the market and banks are encouraged to give loans, on the other hand, considering it is a defense to sell the money printed by other central banks. Do not forget this is the basic rule in the lesson “Central Banking 101.”
18. The most effective central bank intervention is to phone and check during extreme volatility whether the rate the banks have announced and the rate on the screens are correct. Do not forget, the intervention of a central bank of reputation is an intervention that has a very effective consequence, done before the reserves erode.
The Central Bank of the Republic of Turkey (CBRT) continues to be a part of the economic policy conducted by the government. The ground of the economic crisis was laid with the fire of a political crisis. It moved to a new level with the pandemic. Now, there is no possibility left that the Central Bank helps bounce back or curbs the situation.
The effort of “trivializing the issues” demonstrates the stance of Turkey's economy administration of “intervening on the symptoms and not on the issues.” It is the effort to sooth the society, to narcotize them by saying, “If you do not know, have not heard of it, if you do not care, then you are happy.”
Our economy administration wasted billions of cash foreign currency of the Central Bank and public banks just to maintain a self-styled economy policy and to keep the foreign exchange rate at a certain level. It is a pity that now, this economy management, with its collapsed economy policy, is resorting to the monetary tightening of the Central Bank.
Unlike what those in Ankara who are managing the economy believe, 51 percent of the economy is not psychological perception, it is trust. Empires of fear do not generate trust.
Those who are ruling the country are spending so much energy on blaming vague foreign powers for all the wrong and bad management. If they could have channeled this energy to understanding the problems of the country, then we would have gone a long way and truly would have made these “foreign powers” envious of ourselves.
Turkish Treasury is “printing” forex bonds to create additional foreign currency for its own operations. Public banks, on the other hand, are spending their cash foreign currencies and replacing them with forex bonds the Treasury is printing.
For a long time, Ankara had eroded foreign currency reserves worth near 100 billion to hold the rate. Now, it has come to the end of the road. It has spent its last penny and left the rate to the markets. Thus, the “unheard of” invented exchange rate regime has collapsed.
Can the forex loss in Turkey be recovered without sending the bill to the public? If first signs of the establishment of political normalization, democratization and rule of law emerge in a powerful way in Turkey, then the “shrunken” foreign currencies will come back to the system.
If the ruling Justice and Development Party (AKP) sees an increase in erosion of their votes and the increased possibility of losing power in a possible election then it would "use all the ammunition till it is finished" for their own political continuity. But this would indeed mean leaving a “gigantic wreckage” for the citizens of the country.
The trend in that started just before the presidential elections in 2018 and accelerated after the elections changed the chemistry of the economy in Turkey. Private sector in Turkey was restricted in every aspect. From pricing to sourcing, to investment licenses, all regulatory higher bodies worked to make the entrepreneurs feel that ‘the party state’ was watching them at every step.
A currency, that is losing value and is not the good money to its own citizens, cannot be the good money of another country. Most probably those who declared they have switched to the Turkish Lira in Syria will be doing their payments in Turkish Liras and - even if it may be only a few pennies - they will keep dollars to store the value of their accumulation.
No matter how long or short the COVID-19 crisis lasts, a broad range of working masses, but especially the unskilled labor force will be the ones exceedingly affected. They will lose income and their jobs. As a result, inequality will spread on a mass scale and poverty will soar.
Ankara thinks it can obtain stability through the sale of foreign currency from the “back door,” which erodes reserves. Ankara has also resorted to bans and restrictions on foreign currency, but these are actually very old tools from the 70s.
The economy management in Ankara may have this thought of stopping the devaluation of the Turkish Lira by wounding the lira’s convertibility but actually it also damages the debt capacity of the Treasury.
In those countries where it is presented as they have a “floating exchange rate regime,” if their central banks are intervening at the exchange rate, the name of this in economy literature is “fear of floating.”
Since the COVID-19 crisis erupted, Turkish Central Bank’s reserves fell nearly 20 billion dollars. Now, the thought of “Can there be a swap line opened from the U.S. Central Bank Fedreserve ?” is in question.
Turkey was caught with the coronavirus outbreak at a time when it was weak structurally. Just like in the COVID-19 epidemic, the underlying disease story is the story of those problems in economy which were “swept under the carpet” for a long time. Turkish government's economy policies after 2018 were based on bans, limitations and covering up of the symptoms rather than resorting to necessary steps to solve the problems.
Ali Babacan's unfulfilled desire, the “fiscal rule” theme features in the program of the newly established Democracy and Progress Party’s (DEVA) . Babacan had made preparations to start the practice of fiscal rule in 2010, until Prime Minister Erdoğan shelved this.
Even though its name is “floating exchange rate regime,” the current one in Turkey can only be called “commanded foreign exchange regime.” Some may object to that and suggest “managed floating rate regime.” If it was the latter, then the Central Bank would have openly done it. Everybody would have been informed of a rate regime which has targets, a framework and a system. But we do not know anything about this “dystopian regime.”
Talking about Turkey’s economy is like a stand-up show. Turkey’s Central Bank is as independent as the Fed, says the Finance Minister. This comparison can be uttered because of the mood created in Ankara where the government commands the economy. But even in regimes of command economic, there is interdict and logic.
Politicians may have an inclination to regard the Central Bank as a “cow of the government to be milked.” But it is logic blowing that those who have undertaken CB jobs have rolled up their sleeves and personally worked for that.
In the last two years, the economic policy team governing in Ankara that has been intervening on prices, interest and exchange rates with an iron fist has cost banking executives their jobs for making their own trade decisions in an open market. Turkey is supposedly an open market economy, but Ankara has been nudging market players under the table to the point that the market is “open” only in theory.
Both the consumption and investment data in the third quarter show a tendency toward “exhausted growth” in the private sector. I wrote at the end of October that this is the picture of weak, anemic growth. The economy is out of energy. With the economy in this weak and feeble state, Ankara cannot carry the country politically to 2023.
The "orchestrated" issue on the agenda last week was an effort to form public opinion about punishing comments on economy by jail sentences and monetary fines. Stories in newspapers were followed by a speech by Economy Minister Berat Albayrak the next day, who wanted to lay "thought infrastructure" for this.
Russia's strategy is quite clever; it continues to accumulate reserves by using dollar and euro for its exports while using ruble for one third of imports. By receiving 7-8 percent of its net foreign trade in ruble, it creates demand for its currency at the same time.More so, Russia is trying to recruit Turkey as a customer for its Russian made SWIFT alternative SPFS and again homemade credit card system MIR.
The three-way wheel of the Turkish economy, which depended on the flow of foreign capital, domestic credit growth, and household consumption, has stopped. It seems like the politicians running the country in Ankara couldn't find the answer to "What awaits the Turkish economy in 2020?"—since they undertook a military operation in Syria to get back the votes they lost due to the economic crisis.