The Turkish lira headed for its biggest gain this year, extending Friday’s advance after the government announced new measures to bolster the currency and cool lending.
The lira jumped more than 5% to 16.0956 per dollar, the strongest advance among emerging markets, taking its two-day rally to almost 8%. Meanwhile the benchmark Borsa Istanbul 100 Index fell as much as 2.8%, the biggest slump in more than two weeks, led by losses for exporter companies.
The country’s banking regulator is restricting commercial lira loans to corporate borrowers if they hold more than 15 million liras ($890,000) in foreign-currency and if the amount exceeds 10% of total assets or annual sales, the regulator announced Friday after markets closed.
The move is one of the most forceful attempts to support the lira this year by Turkey’s authorities without resorting to a rate hike. Unorthodox monetary policies that favor low interest rates have left the country with the biggest negative rates when adjusted inflation.
The initial impact of the new regulations will be “severe,” but the measures may ultimately only provide short-term relief once large companies like exporters reduce their foreign currency exposure in response, Deutsche Bank economist Fatih Akcelik and Christian Wietoska write in a note.
The lira was trading 1.4% higher at 16.6952 per dollar as of 10:10am in Istanbul. The five year credit defaults swaps fell for a third day to the lowest level since June 7.
Vulnerable Stocks
The BIST 100 Index was trading 0.9% lower at 10:52 a.m. in Istanbul, with 84 stocks out of the 100 membered gauge declining. Shares of exporters, including the glassmaker Turkiye Sise ve Cam Fabrikalari and the steelmaker Eregli Demir ve Celik Fabrikalari were the biggest drag by points.
Out of more than 400 listed companies, 58 of them have excess FX deposits on their balance sheets that are larger than the regulatory thresholds stipulated by the new rule, according to Pinar Uguroglu Delice, TEB Investment’s deputy director of research in Istanbul.
In order to continue tapping the lira loan market, these firms could sell off the excess amount, which TEB Investment calculates as 91.5 billion liras (or $5.6 billion). Other options including allocating funds to Turkish Eurobonds, investing in inventories by pulling forward imports, or switching to “FX-protected lira deposit accounts,” she said in a report.
Enka Insaat, Turkcell, Ulker, Ford Otosan and Kardemir are seen among the most vulnerable to the regulation due to the large excess FX liquidity they carry.
Bloomberg