Interest rates and reserves
Rather than talking about strategic reforms, which may have a positive impact even though they are by definition long term, we had better talk about the current financial scene.
Net reserves are down, as everybody knows, and when they seem to go up, they are swaps in fact. Swaps can’t be considered as net assets or reserves.
Now, net reserves are $28.44 billion, April 12. However, they are in fact possibly lower due to swaps. Reserve loss is obvious: from $35.2 billion on March 1 to $29.7 billion on March 29 to $27.9 billion on April 5. Because swaps aren’t in fact reserves, even this move may not reflect facts.
The oddity shows itself in the northeast corner of the Deposits of Residents and USD/TL Rate graphic. Ordinarily, people display herd behavior and buy FX when the exchange rate jumps. Here, we observe how residents behave differently, and pile up FX deposits even when the lira actually appreciates. Then, behavior gets normalized, not because they refrain from so doing, but because the exchange rate heads north also.
We will see if the 22.5 percent TRY deposit rate can provide shelter, but I think the breakeven for residents not to buy FX is in fact higher.
Besides, the FX deposits/M2 ratio has been running up since 2010. In the beginning of 2011, this ratio stood at 26 percent; now it is 49.6 percent. This, despite the fact that M2 itself expanded 3.5fold since the beginning of 2011.
Now, as this ratio stands, anything above 50 percent is risky in the sense that asset dollarization might jump-start above a threshold. In the aftermath of the 2001 crisis, this ratio was nearing 60 percent.
Above 50 percent, inertia or long-memory can feed in, dollarization might speed up, and at some point, it would require much more than ordinary TRY rate hikes to turn it down anew.
This picture alone shows how dangerous it is to toy with TRY interest rates, whether they be bond, loan or deposit rates. High carry trade funding alone wouldn’t wash after a certain point, because this is what the CBRT funding rate was about in the last couple of months.