De-dollarization

▶ According to monthly statistics released by the BRSA, residents’ holdings are decomposed as follows: 58.5% TL, 33.8% FX and 0.077% precious metals.

▶ Exactly a year ago the share of TL deposits looked higher: 61.9%. But this was only because exchange rate-protected accounts were larger and they were counted as TL deposits.

▶ Ironically, as the return to TL deposits gets impetus, the share of TL deposits fall and that of FX deposits rise because some of the released funds go straight to FX assets.

▶ Twisted as monetary policy was for almost two years at the very least –in fact the origin of the malaise can be dated back to late April 2018, at least the FX-protected account invention helped curtail M2.

▶ The residents’ FX deposits/M2 graphic alone is of consequence because it shows the close connection between FX deposits of residents and M2 supply. Everything is inflationary in this out-of-equilibrium economy but demand for FX by residents surely is one of them.

▶ De-dollarization is of paramount importance for every kind of economic goal but inflation is the first priority these days –or it should be. I think households would prefer TL assets more in the near future. This would increase the chances of the programme tremendously.

▶ Yet we also know that as credibility builds up and as CDS falls as an all-in risk metric for local assets, businesses will have access to FX credit more easily and more cheaply. We have seen this before –after 2004- for more than a decade.

▶ Thus, we may observe two opposing trends going forward: households accumulate TL assets whereas corporates borrow in FX and develop a need for hedging, i.e. they will also hold FX assets because the liability side will increasingly be denominated in FX.

▶ As the odds of success rise, unbelievably many people speculate about the value of the Lira. It is still undervalued. And unless something awkward happens, it will remain stable and de-dollarization of residents will become a visible trend soon.