Financial markets in Turkey have faced new turbulences this month ahead of the local elections to be held on 31 March. Foreign exchange (FX) reserves dropped by -7% in the first two weeks of March, the steepest two-week fall since the height of the currency crisis in August 2018. This led to an acceleration of the TRY depreciation, ongoing since end-January, as investors suspected the Central Bank of Turkey (CBT) would use reserves to prop up the currency. The TRY weakened to 5.85 per USD on 22 March before settling at 5.76 (down -5.5% in the day) its worst closing value since last October. The CBT reacted but instead of raising its key policy one-week repo rate, it left that rate unchanged at 24% but suspended its use and began funding at higher rates. This marks a return to the unorthodox “back door” monetary tightening which the CBT had abandoned only last June – a move that will not help improve investor confidence. The latter was further undermined by government threats against bankers and investors over alleged FX meddling. The TRY recovered a little this week but trading remained highly volatile, while the Borsa 100 Istanbul Index kept on falling (-7% in March to date) and bond yields continued to rise. Expect volatility and risks to remain high in the next weeks.
