Turkey’s response to the coronavirus pandemic, including the central bank’s record program of quantitative easing (QE), has tightened the grip state institutions have on the country’s bond market andaccelerated the departure of foreign investors.
The central bank’s QE asset purchases since March have left it holding 89 billion lira ($13 billion) in government debt, rocketing up from 19 billion at the end of last year. Some 23 billion lira of the bonds it holds are from an unemployment fund that tops up workers’ wages.
“This is an additional risk to inflation through the lira and can trigger a vicious cycle that can happen much more quickly, and it’s a risk for investors,” he said.
The lira has fallen 13 percent this year and lost 60 percent of its value against the dollar in the last five years, the weakest performer among global peers in that period.
More weakness could pressure the central bank to reverse an aggressive rate-cutting cycle that was halted last month.
It could also cut deeper into the bank’s depleted reserves, which analysts say have helped fund state bank interventions to stabilize the lira in FX markets. Goldman Sachs estimates the central bank sold some $60 billion in interventions this year.
The QE has left the central bank only 10 billion lira shy of a self-imposed limit for government debt holdings. It now finances 6.3 percent of the Treasury’s domestic borrowing, up from 2 percent over the last decade.