Turkey’s changing economic and monetary policies following last year’s general elections have positively contributed to the foreign exchange open positions of both the public sector and companies and individuals. According to the calculations of QNB Finansbank economists, from June 2023 to June 2024, the public sector’s foreign exchange position deficit decreased by USD 143.4 billion to USD 186.4 billion. In July, the public sector’s FX open position fell to USD 165.2 billion, the lowest since November 2021.
QNB Finansbank economists Erkin Işık, Deniz Çiçek and Kaan Özçelikkale calculated the difference between FX assets and liabilities in the balance sheets of economic actors, i.e. the net FX position. The economists reminded that if foreign currency assets are higher than liabilities, they are positively affected by the rise in exchange rates, while in the opposite case, they profit from the fall in exchange rates, and in this context, they calculated the foreign exchange positions of the public and private sectors using the data announced by the Central Bank, the Banking Regulation and Supervision Agency and the Ministry of Treasury and Finance.
USD 50 billion is a healthier level
Economists pointed out that the public sector’s reduction in foreign exchange risk and making its balance sheet healthier is considered a positive development in terms of the country’s credit risk decline and the stability of the exchange rate in the medium-long term: “However, the current situation points to a risk outlook similar to the end of 2021, prior to the Forex Protected Accounts (KKM) . It would be healthier for the public sector to reduce its total FX open position to around USD 50 billion before 2018, i.e. approximately USD 115 billion less than the current situation. Nearly USD 60 billion can be expected to come from the private sector’s current FX position surplus, provided that stability-oriented policies continue. However, the private sector’s FX position turning into a deficit, as in 2018 and previous years, may not be preferred as it would create the risk of fluctuations in foreign exchange. In this case, foreign investors will need to increase their TRY investments, which are still historically low.”
USD 159 billion of surplus for individuals and companies in June 2023
Referring to the policies implemented before the general elections, the report reminded that within the framework of the policy of keeping interest rates low and controlling exchange rates, the Central Bank focused on foreign exchange sales starting from 2019 and the exchange rate hedged deposit (KKM) practice was put into effect at the end of 2021. According to the report, residents first covered their FX risks and then switched to long positions in FX. In terms of companies, the FX open position, which was USD 173.4 billion at the end of 2018, decreased to USD 84.9 billion in June 2023. In the same period, individuals also increased their foreign currency investments. Total foreign exchange position surpluses, calculated as the sum of foreign currency deposits, foreign currency securities and the KKM starting at the end of 2021, increased by USD 124.9 billion from the end of 2018 to June 2023, reaching USD 241.3 billion. The FX position surpluses of private banks did not change much in this period as USD 2.6 billion in June 2023. The FX position of the private sector, which is the sum of these three sectors, turned from a deficit of USD 54 billion at the end of 2018 to a surplus of USD 159 billion in June 2023.
The public sector met the private sector’s foreign exchange demand of USD 213 billion and the foreign exchange outflows of non-residents. The biggest burden here was borne by the CBRT, which assumed USD 246.2 billion of foreign exchange risk between the end of 2018 and June 2023, reaching an open position of USD 204.7 billion, including the KKM. The Treasury also increased its FX-denominated debt stock by USD 53.6 billion in the same period, partially meeting the market’s need for FX assets. When the foreign currency deposits of the public sector and the foreign currency position of public banks are included, the public sector’s total foreign currency open position increased by USD 284.1 billion to USD 329.8 billion between the end of 2018 and June 2023.
USD 101 billion decline in the last year
The positive impact of the stability-oriented economic policies implemented since the middle of last year reversed this trend. Domestic private sector and foreign investors tended to carry more foreign currency risk. According to the latest data released as of June this year, the FX open position of companies increased by USD 34 billion in the last one-year period to USD 118.9 billion. Individuals’ FX investments also declined by USD 65.2 billion in the same period, USD 58.4 billion of which was due to the decline in the KKM. Banks’ FX position surpluses also declined by USD 1.7 billion, bringing the total FX position surplus of the private sector down by USD 101 billion in the last one year to USD 58 billion in June 2024.
In the same period, the public sector’s FX position deficit fell by USD 143.4 billion to USD 186.4 billion. When calculated from the public sector data released earlier, it was seen that the public sector’s foreign exchange open position decreased to USD 165.2 billion in July, the lowest level since November 2021. The decline in the public sector’s FX position deficit was about USD 42 billion more than the decline in the domestic private sector’s FX position surplus stemmed from foreign investors increasing their TRY investments, primarily through the carry trade channel.
