Turkey: FX rate protection for TRY deposits

The most prominent title in the package; Although there is a higher exchange rate increase than the TRY deposit return, it is related to an investment incentive that protects the saver from the risk of foreign exchange increase.

We can divide President Mr. Recep Tayyip Erdoğan's economy and lira investment incentive package into three main headings;

 

·        In response to the foreign exchange demand of domestic residents; TRY investment incentive, which guarantees the gain from TRY deposit interest and includes the extra return arising from the exchange rate

·        Incentive to increase savings by increasing the state contribution to Private Pension System

·        Aiming to prevent exchange rate uncertainty in commercial life by giving forward exchange rates to the exporter who has difficulty in determining the price.

 

In this context, Highlights of Mr. Erdogan's statements and our comments;

 

·        From now on, none of our citizens will have to convert their deposits from TRY to foreign currency, fearing that the fluctuations in the exchange rate may remove the gains from interest payments.

·        No-delivery forward rates will be given to help exporters mitigate their currency risks arising from high levels of volatility.

·        Turkey has no intention or need to take any step back from the free market economy and foreign exchange regime.

·        The withholding tax will be reduced from 10% to 0% for investments in lira-denominated bonds issued by the government.

·        The state contribution to the private pension system will be increased from 25% to 30%.

 

The most prominent title in the package; Although there is a higher exchange rate increase than the TRY deposit return, it is related to an investment incentive that protects the saver from the risk of foreign exchange increase. According to this; In the time TRY deposit account, interest is guaranteed, even if the exchange rate increase is higher than the TRY interest, the difference is paid on the yield. Here, the difference between the exchange rate and the interest rate on the day you deposit and the maturity date will be checked. If the exchange rate rises more than the TRY deposit interest, a higher return will be obtained than the normal deposit yield. The difference will be paid to the depositors in TRY. Against foreign exchange risk, the investor will be shielded in a way that guarantees TRY return and earns above market interest rates. It is probable that certain maturities will be taken as basis for exchange rate difference payments. Just as the interest payment corresponding to partial withdrawals is cut off in maturity repayments, a similar situation will also be in question for the exchange rate return. Well; Such as 6-month periodic interest + (exchange rate return in the relevant period - periodic TRY deposit return) in 6-month maturity or 12-month interest in 1-year maturity + (exchange rate return in the relevant period - 12-month TRY deposit interest). The difference is; In DCD, there is a risk of loss of principal when the exchange rate moves contrary to expectations. However, if the exchange rate falls below certain levels and the exchange rate return remains below the deposit yield, there will be no reduction in the principal, because the principal + TRY deposit interest is guaranteed. If the exchange rate increases further, there will be additional returns.

 

Therefore, it can be evaluated to reduce the demand for foreign currency and to protect the TRY saver according to the increase in the exchange rate. The risk of TRY depositors is that the exchange rate will increase or not fall below certain levels. If there is an expectation of an increase in the exchange rate, the normal investor behavior with the incentive to hedge against inflation is to switch to foreign exchange savings. This measure helps to suppress the exchange rate as it will make the return of TRY deposits attractive.

 

Now, it is necessary to talk about some macroeconomic balances and the topics of public finance and banking sector. Namely; It is understood that the exchange rate difference will be paid in TRY. That is, even if the increase in the exchange rate in the relevant term is reflected in your income, you will see the TRY equivalent of this in your account. Plus, will the account holders want to convert the exchange rate difference in TRY equivalent they receive into foreign currency in their maturity payments? Will the foreign currency interest income applied to the foreign currency accounts be included in the payment while paying the exchange rate differences? Or will interest be paid in a foreign currency in the form of LIBOR or EURIBOR + a certain basis point? (Based on benchmark interest rates that are subject to foreign currency investments). It will be necessary to consider the effect of inflation in terms of the total money supply and the amount of TRY in the market.

 

While aiming to solve the problems that may arise from the increase in foreign exchange in the short term; The fact that the exchange rate difference payment will be made by the Treasury should be evaluated in terms of budget balance. If there is not enough room in the budget, will banks and Central Bank reserves also be sources of payment? If banks are to assume the exchange rate risk, will they reflect their costs on their loans? Considering the problems in the reserve adequacy, what will be the financing adequacy if the volatility in the exchange rate is above the desired levels?

 

Kaynak Tera Yatırım-Enver Erkan
Hibya Haber Ajansı