BY FATIH OZATAY
I took a glance at the websites of several newspapers last week before Saudi Crown Prince Mohammed bin Salman held official talks in Ankara. Most of the news linked Salman’s visit with the Central Bank’s (CB) foreign exchange (FX) reserves. Bin Salman was expected to contribute to our FX reserves.
I’m not a foreign policy specialist. I watch everything from a distance. I don’t know what specialists on the issue say, but I guess things look bleak for us. Of course, you can ask if a give-and-take situation has emerged, or what happened with the assassination of Khashoggi. I’d should stop dogmatizing things that I don’t know about and get back to the FX issue.
The level of Saudi Arabia’s Gross Domestic Product (GDP) relies on crude oil prices. Saudi Arabia’s GDP, which amounted to USD 700bn in 2020 and USD 834bn in 2021, is expected to exceed USD 1tr this year. The numbers are quite volatile. Salman can ‘contribute’ USD 40-50bn to the CB’s FX reserves, according to some ‘gossip’ news and social media. The figure corresponds to 5% of Saudi Arabia’s GDP. So, how realistic is this? Which mechanisms might be used? Swap deals with other countries are being referred to. What do these do? First, international swaps don’t raise the CB’s FX reserves. Second, will a deal with the Kingdom allow to use of swaps to pressure FX rates? Third, let’s assume that this is the case. Won’t the net FX reserves further disappear as debt will continue but assets will be gone?
Here is a more realistic alternative: Can the gold held by the CB be sold to Saudi Arabia for USD with a permanent or long-term maturity redemption agreement, for instance? If yes, then we talk are talking about USD 20-25bn instead of USD 40-50bn. This will also not increase net FX reserves, but the CB will have FX for intervening in FX rates. Let’s consider it as an option more easily realized than selling the same amount of gold at once on the international market.
What will it do? How much USD has the CB sold since USD/TRY exceeded 17.50? I haven’t calculated. But some people calculated it and the results of these serious calculations are frequently reflected in the press. The figure exceeds USD 40bn. Has it worked? USD/TRY has approached its peak recorded in December after about six months. Of course, you can say they managed for six months. A part of the FX that were sold were those funds that exporters had to transfer to the CB as a result of executive decision. You can also say if that FX wasn’t transferred to the CB, exporters would have sold it on the FX market to meet their import needs.
However, these things aren’t linear. Especially after CDS exceeded 800 basis points, we can’t say USD 26.6bn will be enough to manage for four months more as we managed for six months with USD 40bn. (USD 26.6bn is the result of the direct proportion: If six months are managed with USD 40bn, how much USD will be needed to manage for four months?) Let’s assume that four more months are managed. Then what? There is an urgent need for a proper economic plan.