As Turkey's lira comes under pressure it triples currency swap deal with Qatar to $15bn

Ankara's net foreign exchange reserves currently stand at just $25bn, according to London-based Capital Economics

An electronic board displays prices at a foreign currency exchange bureau in the Beyoglu district of Istanbul, Turkey, on Thursday, May 14, 2020. The global demand shock that followed the coronavirus pandemic is exposing a key vulnerability for Turkey’s external finances, with stimulus at home worsening an imbalance between imports and exports while creating another pressure point for the lira. Photographer: Kerem Uzel/Bloomberg
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Turkey's Central Bank agreed a deal with Qatar to triple the size of currency swap lines between the two countries in a bid to alleviate some of the pressure on the lira in currency markets.

Turkey and Qatar initially agreed in August 2018 to a swap line between Turkish lira and Qatari rials that was the equivalent of up to $5 billion (Dh18.36bn).

"With the swap amendment agreement, the overall limit has been increased ... to $15bn equivalent of Turkish lira and Qatari riyal," the Turkish central bank said in a statement on its website.

"The core objectives of the agreement are to facilitate bilateral trade in respective local currencies and to support [the] financial stability of the two countries," it added.

The agreement between the two countries was established in 2018 after the lira came under pressure on global currency markets as Turkey’s current account deficits widened. That led to a battle between the government and the central bank over hikes in interest rates, and the dismissal by President Recep Tayyip Erdogan of several central bank officials including the governor last year.

The lira strengthened again in late 2018, but concerns about the stability of the country’s finances remained, with Moody’s cutting its sovereign debt rating further into junk status in July last year. The rating agency said Turkey was “highly vulnerable to a further prolonged period of acute economic and financial volatility”.

Turkey had lobbied the Group of 20 nations to be included into swap lines that the US government has extended to other nations, albeit without success, according to Bloomberg.

The lira has faced renewed pressure in recent weeks as investor concern grew about the likely impact of the coronavirus pandemic on its economy. In March, the International Monetary Fund estimated Turkey’s GDP would shrink 5 per cent this year, compared to growth of 0.9 per cent last year and unemployment will surge to 17.2 per cent from 13.7 per cent.

As of Wednesday, Turkey had recorded more than 151,000 Covid-19 cases, and 4,199 deaths.

"The announcement of the swap with Qatar helps alleviate concerns regarding Turkey’s external vulnerability – given the widening of the current account deficit to $5bn in March, outflows and declining reserves – particularly ahead of tomorrow’s [monetary policy committee] meeting, in which the [Turkish central bank] is expected to continue cutting interest rates," said Carla Slim, an economist at Standard Chartered Bank.

"We expect an above-consensus cut of 75 basis points, putting cumulative easing at 1,600bps since July 2019 and effectively unwinding the monetary policy tightening that followed the 2018 currency crisis,” she said.

Last week London-based Capital Economics said that on a net basis, Turkey has just $25bn of FX reserves, and short-term external debts of more than $170bn.

"The increased FX swap line provided by Qatar will help to temporarily paper over the cracks in Turkey’s economy, but the extra $10bn is really a drop in the ocean compared with the country’s external financing needs,” Jason Tuvey, a senior emerging markets economist at London-based Capital Economics, said.

“We think that the Bank of Japan and Bank of England will ultimately follow the Fed in rejecting Turkey’s requests for currency swap lines," Mr Tuvey said, adding "the hit to the balance of payments and the response from Turkish policymakers to pressure on the lira has certainly raised the risk of a rerun of the 2018 currency crisis.”