Real sector downsizes its FX short position

Dünya Executive - - COMMENTARY -

For years, it was thought that the exchange rate would not increase. With this in mind, the real sector has focused on foreign financing and the foreign exchange deficit has increased. We were shaken by last year’s exchange rate increase, and we are still experienci­ng the effects of that shock. The real sector has been struggling to reduce its short position in foreign currency this year once again and trying to expand its assets by buying foreign currency for this purpose. The open position in foreign currency decreased by $9.5 billion due to the increase in assets in three months.

When there was an overabunda­nce of foreign exchange around the world, Turkish companies did not mind moving their borrowing abroad. It was much more expensive to borrow domestical­ly. There was a

lot of foreign exchange abroad and there was no indication on the horizon that the exchange rate would rise. So everyone went for foreign currency. Foreign currency borrowing was even implicitly supported by the government.

No one wanted to see exchange rate volatility and so no one thought about it. The fantasy was that this abundance of foreign currency would continue for years, and the real sector, free from an exchange rate burden, would provide comfortabl­e financing with foreign exchange loans, which it would charge very low interest compared to theyr TRY counterpar­ts. This scenario looks good on paper but less so in real life. At the end of 2017, real sector institutio­ns had a foreign exchange liability of $328 billion against $115 billion in foreign exchange assets. In other words, net foreign exchange liability was $212 billion. Roughly there was a three dollar liability against one dollar foreign currency asset, a two dollar deficit.

When the exchange rate climbed in 2018, the real sector was shocked. We had to face that fear that we had tried to ignore. We were not able to increase our foreign currency assets much but foreign currency liabilitie­s decreased by more than $10 billion to $ 317 billion. Thus, the open position fell to $201 billion.

Assets jump by $9 billion

The foreign exchange assets of the real sector started to increase again in February. Total assets, which were $115 billion in January, rose to $118 billion in February and $124 billion in March. This increase was entirely due to deposits. The real sector’s foreign exchange deposits, which were $73.7 billion at the end of January, rose to $76.9 billion at the end of February and to a record $82.1 billion at the end of March.

A total increase of $9 billion was seen in foreign exchange assets in the first three months of the year. On the other hand, the foreign exchange liability decreased by $627 million. As a result, the real sector’s short position, which was $201.4 billion at the end of last year, fell to $ 191.9 billion at the end of March.

Meanwhile, the net foreign exchange position with a maturity of less than one year broke the record for the period after 2010. The shortterm foreign exchange surplus rose to $8.7 billion by the end of March, a $7.5 billion increase compared to new year’s eve. This amount stemmed entirely from the increase in deposits. The real sector’s deposit growth in the first three months was $8.7 billion.

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