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How to sell FX with no decline in Central Bank reserves?
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We all know that during the recent sell-of in emerging markets that lasted from mid-May to end-June, Turkey was among the hardest-hit concerning the value of the currency, interest rates and the stock exchange. Turkey is a mid-income, not-so-wealthy country with fairly developed financial markets and no international capital controls. In such countries, financial turbulence is equivalent to foreign financial capital flight. This must be especially so in Turkey now, as the country has been incurring an ever-growing current account deficit, mostly financed by international hot money, for the last 3.5 years. Thus, during the recent turmoil, the swift rise in the USD-TRL rate from 1.32 to 1.76 was basically caused by the exodus of foreign financial capital.
Now, with this information in hand and given our knowledge of balance of payments mechanism and past behavior of the Turkish FX market during previous sell-offs, we would naturally expect to see a decline in the Turkish Central Bank’s FX reserves these days. Surprisingly, no such decline is to be observed in the daily CBT balance sheets. (The daily balance sheets do not include figures for the FX reserves as such, but the total foreign assets of the CBT, a very close proxy, are there. The FX reserves figure, separately announced by the bank on a weekly basis, is always a fraction lower than the total foreign assets figure and the two are always very closely correlated.) According to the CBT balance sheets, on May 9th, the first day of the global EM sell-off, total foreign assets of the CBT stood at USD 61 bio. On June 30th, when markets had finally calmed down after seven turbulent weeks, total foreign assets of the CBT were still at USD 61 bio. To say the least, this has been a very big surprise to me as somebody who has been studying the CBT’s balance sheet and Turkish financial markets every single work day since 1995.
It is not only the comparison between the pre-turmoil and end-point levels that is startling; there are many specific days that we can point to during which the market events and the balance sheet do not fall together. For instance, on June 26th, the CBT held an FX-sale auction in the morning and sold USD 500 mio. When this wasn’t enough to quench the FX thirst, it intervened direcly in the FX market in the afternoon and sold more dollars. The amount of the direct intervention was not disclosed, but the market estimate for the total CBT FX sale for that day ranges between USD 1 –2 bio. However, the CBT balance sheet for June 26th tells us that the CBT’s total foreign assets has not declined on that day. On the contrary, there is a small rise of USD 353 mio, and the net FX position of the CBT has also increased by USD 138 mio, which means that in net terms, the CBT has not sold, but bought FX on the 26th! As the FX sale on that day is estimated at a minimum of USD 1 bio, this means that while CBT was selling this amount to some market participants, it bought at least 1 bio and 138 mio dollars from some other market participants. The CBT can buy dollars only from banks. On June 26th, one of the most turbulent days of the recent turmoil, would any bank decide to sell USD 1 bio, or even USD 2 bio to the Central Bank? It is hard to imagine the existence of such a valiant and optimistic Turkish bank.
On the other hand, the existence of reliable data on Turkey’s official FX reserves is of crucial importance for the international investor now, who will have to steer through troubled waters in the days ahead. |
| Tarih
: 14.09.2006 |
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© 2006 Mert TOKER All Rights Reserved. |
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