In which case would you exchange your dollars?
The Turkish lira has been depreciating since 2010. During this period, it only gained value for a year. Considering the last six months, we have seen an average of 15.5 percent decrease in value annually. This ratio has always been above inflation. Foreign exchange assets of natural entities have seen their all-time high at $116 billion. Furthermore, if we take a look at the period that began on August 10 with the exchange crisis and now, people have exchanged dollars during six weeks out of 46 and bought foreign currency during the rest. In the meantime, the cost average has been between 5.60-5.70 liras.
These are the things we already know. Now let’s take a look at what’s coming. We have left the stage to our audience at the Bloomberg HT Radio and asked them: “In which case would you exchange your dollars?” The responses are striking:
-When I feel confident
-When I’m sure that my money
won’t decrease in value
-When I’m sure my purchasing power hasn’t dissolved
-When inflation declines
-When Turkey’s CDS (credit default swap) once again returns to 150-levels (it currently stands at 350)
-When I see signs of structural reforms
-When I believe that the law acts as an assurance of my property
Some investors are considering what’s going on from an ideological standpoint and evaluate the responsibility through governance. Thereby, despite seasonal developments, they choose to invest in foreign currency without taking profit or loss into consideration. It is not easy to change this pattern of behavior. But there were other answers:
- My dollar cost is low. I’ll sell when it surpasses 6 again.
-When the real estate market stirs, I will sell my exchange and buy a property.
These are people who are equipped with a trader mindset who claim that they can interchange asset classes. When we measure the foreign exchange deposits with M2 Money Supply, the rate of dollarization has declined to 54 percent. That is to say, 54 out of 100 liras in our pockets is foreign money. We have only surpassed that level when we hit 64 percent after the 1994 crisis. People are buying foreign currencies. Companies are becoming indebted to foreign currency. Even the nation’s Treasury chooses to take a loan in foreign currency. What I mean is, everyone has a different reason for holding foreign currencies.
A different dilemma ahead
But now, there’s a different dilemma before us. We have stepped into a rate cut cycle. The world is very supportive. We have seen rate cuts from South Africa, Russia, Turkey and the U.S. We have received signs that the ECB will follow suit. In this environment, if the interest decreases, how will it affect foreign exchange demand?
Interest on deposits have fallen around 2.5 points in two weeks. Levels below 20 percent have been seen in several banks. Interest on deposits are declining in banks for two reasons: First is the rate cut signal from the Central Bank and the second is the demand of low interest loans. Banks gravitate towards gathering resources and leaving costs in the background when the demand for low interest loans rises. But, that’s not the situation we’re seeing now.
Hence, when the banks don’t have anywhere to off-load the resources they will gain, they are likely to play the role of a reluctant buyer. Now as the Central Bank has reduced rates, it is highly likely that the same course could be seen on deposits to a certain extent.
What is missing now is a price stability, we cannot convince people to switch to TRY because we cannot ensure that.