Are foreigners behind the increase in FX rates?

Dünya Executive - - COMMENTARY - Alaatt n AKTAS Economist

Net foreign/non-resident buy-sell figures were released for last week. We saw that there was no effect from non-resident trade on the rise in foreign currencies. Non-residents brought $260.1 million to the economy, $25.7 million through stock purchases and $234.4 million through government debt securities. They also made net purchases of $241.1 million in the week between March 9-16. In January, they made purchases of $301 million through stocks and $954 million through government debt securities for a total of around $1.3 billion.

In February, there was an outflow of $361 million from stocks and an inflow of $35 million in government debt securities. Net outflow was thus $326 million. There was an outflow of $106 million from stocks and $214 million from government debt securities up to March 23 this month. While non-residents sold $165 million dollars of stocks, they bought $775 million dollars of government debt securities, bringing the net foreign exchange inflow to $610 million.

So who’s really beh nd the r se fore gn exchange rates?

Unless there’s a sudden turnaround, as of writing, the dollar is at TRY 4.00 and the euro at TRY 5.00. The real rise was in March, when the dollar increased by almost 6 percent. The increase in the euro against TRY was almost 7 percent in March.

One of the factors was the decision taken by the Federal Reserve. There was also an effect from the new import tariffs in the U.S. on steel products. Consequent­ly, the dollar appreciate­d. But still, there are some issues that are hard to clarify. What are the reasons behind the TRY depreciati­ng against both the dollar and euro more steeply in comparison to other currencies?

Demand for fore gn exchange ncreas ng

According to the basic rule of supply and demand, when people seek more foreign exchange, the rate will naturally rise. The supply-demand balance may deteriorat­e for two reasons: either the foreign exchange supply decreases or the ones willing to buy foreign exchange increases.

In the case of Turkey, as it can’t print dollars, it means less foreign exchange flows in or more foreign exchange flow out.

The ones bringing the dollar are the non-residents buying stocks and domestic debt securities. Either they buy less or they sell their assets and buy TRY, change this money into foreign exchange and take it away.

Non-residents are not bringing as much foreign exchange as before, we know that. But apart from non-residents, what have we ourselves done to increase these foreign exchange rates? One of the key reasons for the rise is the demand of Turkish citizens for foreign exchange.

A citizen who is barely able to get 12 to 13 percent on the TRY a year in deposit interest but sees a monthly rise of 5 to 6 percent on foreign exchanges will go and buy foreign exchange. No one can blame them.

Compan es are the b ggest factor

Apart from the ordinary citizen there is a much larger group in need of foreign exchange to hedge him- or herself from inflation: companies. What we mean here is companies with foreign exchange debts. According to the Central Bank, total foreign assets of Turkish companies at the end of last year was $115 billion. But foreign exchange liabilitie­s in comparison were $328 billion. So there was a liability of $213 billion.

It’s not for nothing that Deputy Prime Minister Mehmet Simsek warns companies: “Don’t borrow in foreign exchange unless you have foreign exchange income.”

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