Central Bank experts analyzed the effects of the TL deposit conversion targets introduced for currency-protected deposit (KKM) accounts on the foreign currency demand of legal entities holding foreign currency convertible deposits at maturity. According to the analysis transition to TRY did not create additional FX demand for firms.
In an analysis by CBRT economists, the CBRT economists wrote that the process of switching to TRY, which was initiated regarding the FX-denominated KKM, did not create an additional demand for foreign currency, and that the probability of maturing firms being net buyers of foreign currency decreased significantly after the arrangements made.
The study, prepared by Central Bank economists Yusuf Emre Akgunduz and Unal Seven, examined the foreign exchange buying behavior of firms with FX-hedged KKM deposits.
In the study, it was emphasized that one of the objectives of the tightening process implemented by the Central Bank was to increase the demand for the Turkish lira, and it was noted that it was planned to strengthen the monetary policy transmission mechanism by increasing the share of TL deposits in total deposits. Accordingly, the regulation introduced on August 20 reminded banks of the target of converting maturing KKM accounts and FX convertible currency-protected deposit accounts (DDM) into TRY deposits.
After May 1, 2023, FX purchase and sale transactions of firms with conversion maturities in the spot market during the week of maturity were analyzed. For 28,472 firms whose convertible currency-protected deposit accounts matured in any week between May 1 and November 21, 2023, a weekly data set was created by combining the deposit amounts of matured accounts and FX purchase and sale transactions.
According to the study, while approximately 30 percent of the analyzed firms were net FX buyers at the conversion maturity, this ratio declined significantly after the regulation of August 20. The positive impact of the regulation on FX demand continued in the post-September period, with fewer firms becoming net FX buyers at maturity. In the same sample, approximately 8 percent of firms were net FX buyers in the weeks when they did not have a convertible currency-protected deposit account at maturity.
According to the impact analysis, given that firms have differing FX needs, firm fixed effects are used to control for firm heterogeneity, and week fixed effects are used to control for time effects. In other words, the analysis measures the effect of the maturity date on the same firm’s FX purchases before and after the regulation. According to the results:
- Firms whose DDM accounts mature are 23.4% more likely to become net FX buyers on average than other firms in the sample. This ratio fell to 15.4% after 28 August.
- Firms whose DDM accounts mature are 27.8% more likely to become FX buyers on average than other firms in the sample. This ratio fell to 16.3% after 28 August.
Economists interpret the study:
Economist Ugur Gurses: The study is saying that firms with FX-denominated FX liabilities are less net buyers of FX at maturity. The old habit continues, they try to explain it by going around without telling how much foreign currency liabilities they have, without telling how much foreign currency equivalent solvency they have. Try transparency, it is effective.
Dr. Altug Ozaslan: According to the analysis published on the CBRT Blog, it was found that there was no additional FX demand from corporates during the return of the CBRT’s FX reserve requirement and that the regulations were successful. I think the effect of the highest deposit rate in 20 years is higher than the managed and directed exchange rate level. If we look at the framework holistically, I think the effect of the KKM regulation alone is insufficient.
Economist Kerim Rota: I have two questions about this study: First, is it correct to associate the decrease in the demand of companies to revert from DDM to foreign currency mentioned in the article only with the regulations on exchange rate-protected accounts announced on August 20? On July 28, at the first MPC meeting (August 24) after the change of vice presidents, the policy rate was raised from 17.5 percent to 25 percent and the guidance that monetary policy would tighten further was a game changer. Actors who read the decisions taken in the June and July meetings as “make-up until the local elections” quickly realized that it was not wise to finance raw materials or inventories with TRY loans after August. This may have reduced net FX purchases. Secondly, banks still continue to set the spread between FX buying and selling between 2-3 percent, as they did before the elections. The economic administration is not taking any steps to normalize this. Firms that have the right to buy foreign exchange at the hourly rate set by the CBRT in DDM returns prefer to buy foreign exchange from the CBRT at this rate and then sell it to banks even if they do not actually need foreign exchange. This creates an incentive for firms to buy FX from the CBRT regardless of the periods analyzed (even if they are not net buyers of FX, it increases the gross purchase amount).