As in many countries with memories of hyperinflation and currency collapse, Turkey’s middle class have tended to hold at least part of their savings in hard currency. But unlike in Russia and Argentina, Turkish savers’ propensity to save in dollars has on occasion proved helpful to companies and the central bank. That’s because many Turks, rather than just accumulating dollars, have evolved into savvy players of exchange rate swings and often use sharp falls in the lira to sell their dollars and buy back the local currency. Hence Turks’ hard currency bank deposits, estimated at between $70-$100 billion – on a par with central bank reserves — have acted as a buffer of sorts, stabilising the lira when it falls past a certain level.
But back in 2011, when the lira was in the eye of another emerging markets storm, we noticed how some Turks had become strangely reluctant to sell dollars. And during this year’s bout of lira weakness too, Turkish savers have not stepped up to help out the central bank, research by Barclays finds. Instead they are accumulating dollars — “rather than being contrarian, their behaviour now seems aligned with global capital flows,” Barclays analysts write. While the lira has weakened to record lows this year, data from UBS shows that the dollarisation ratio, the percentage of bank deposits in foreign currency, has actually crept up to 37.6 percent from 34.5 percent at the start of the year. Here’s a Barclays graphic that illustrates the shift.
What are the reasons for the turnaround? In the past, those selling dollars to buy back cheap lira could be confident they would not be out of pocket because the central bank would support the lira with higher interest rates. But ever since end-2010, when the bank embarked on a policy of determinedly keeping interest rates low, they no longer have this assurance. Barclays write:
Households’ past experience in the post-2001 floating lira regime had been that after a periods of sharp sell-offs, lira would typically enter a phase of re-appreciation. However, this changed since the central bank announced its policy shift in late 2010… Since then lira has been trending weaker against the dollar, which over time may signal to Turkish households that buying lira into weakness is no longer a profitable strategy.
Record low lira deposit rates of just over 6 percent, well below inflation, makes it unattractive to hold lira. There are worrying implications to all this. Non-financial Turkish companies had a net short dollar position of $165 billion or 20 percent of GDP as of July. In the past households’ willingness to sell their dollar savings helped to meet corporates’ hard currency needs. As Barclays notes, households’ long dollar positions mitigated the pain for ‘short FX’ corporates: