Turkey promises new bond plan as lira weakness deepens

The lira picked up briefly after Turkish authorities promised a new savings product aimed at stabilising the embattled currency and said they would not resort to capital controls, but the lack of any sustained rally suggests traders doubt the plans will end the growing crisis.

In a trio of announcements on Thursday night and Friday morning, the treasury promised solutions to deal with “topics on our economic agenda, foremost among them inflation and the exchange rate”, including a new bond aimed at encouraging households to keep deposits in the lira.

It also said it would continue to work to “boost the attractiveness of the use of the Turkish lira without compromising on the rules of the free market” — a nod to concerns that Ankara could resort to new restrictions on taking money out of the country.

The lira, which has lost more than 22 per cent of its value against the dollar since the start of the year, strengthened to TL16.75 during early European trading on Friday, but quickly fell to around TL17.20. The rapid decline in the lira is painful for Turkish businesses and households, jacking up the cost of fuel and other imported goods and contributing to rocketing inflation.

The new measures from the treasury are the latest in a long line of unorthodox tactics deployed by Turkey’s authorities as they seek to support the lira and tame runaway inflation while fulfilling President Recep Tayyip Erdoğan’s desire for the central bank to keep interest rates low.

Erdoğan, a life-long opponent of high rates, restated his staunch opposition to raising borrowing costs this week even as the lira came under a fresh bout of pressure.

The treasury has provided few details about the new investment product, other than that it would be a “revenue-indexed bond” with a guaranteed minimum return.

Analysts said it could resemble a previous revenue-indexed bond issued by the treasury in 2009 and 2010, which offered yields linked to the revenues of state-owned entities including the national oil company and the airports authority.

Haluk Bürümcekçi, an Istanbul-based economist and consultant, said the profits of some public institutions had increased 70 per cent in the first four months of 2022 compared to last year — a figure that suggests that the bond could offer returns that outstrip deposit rates being offered by banks.

The average deposit rate offered by commercial lenders stood at less than 16 per cent in early June, according to central bank data — a rate far below inflation, which reached a 23-year high of 73.5 per cent in May.

Bürümcekçi predicted that the new bond would “attract attention” if the guaranteed return was higher than deposit rates.

Others were less sure. “It is difficult to attract deposit holders who do not have equity investing experience or sufficient financial literacy,” said Özlem Derici Şengül, founder of the Istanbul-based Spinn consultancy.

One Istanbul-based banker warned the bond, which the treasury said would be open only to retail investors, would do nothing to tackle the demand for foreign currency from companies that has been a source of pressure on the lira. 

Turkey has increasingly resorted to micromanagement tools to support the currency in recent years as Erdoğan’s growing power over the central bank has limited the room for using monetary policy as a way of stabilising the lira and curbing inflation.

In December, when the lira plunged through a succession of record lows, authorities stabilised it partly with a new savings scheme that offered to protect savers against exchange rate losses if they converted foreign currency holdings into lira.

There has been growing concern among bankers and analysts that individuals and corporates will not roll over their deposits held in the scheme when they mature in the months ahead — risking new pressure on the local currency.