After years of depletion of currency reserves and other expensive measures, Goldman Sachs has issued a warning about the possibility of volatility in the foreign exchange market in Türkiye when the country is getting closer to elections.
The Wall Street bank warned that although it was not its base case, issues may arise if corporations and savers started to worry that a new government’s adoption of more conventional economic policies would cause volatility in the short-term FX market. According to Goldman, the present market uncertainty “poses considerable risks.” The company made this statement in a research note released on March 1
Türkiye is Economy is at an Impasse
Authorities might attempt to halt the lira’s decline by offering local banks FX swaps and reassuring those who have money put in depreciation-protected bank accounts, but these strategies might not be successful. Time is not likely to be on the authorities’ side because of the short-term nature of the instruments, according to Goldman’s analysts. So, it seems like there will be a need for temporary fixes.
With the steep decline in Türkiye’s foreign exchange reserves in recent years, the lira would collapse if issues do develop. When accounting for illiquid assets like gold, bilateral swap lines, and IMF Special Drawing Rights, according to Goldman, Türkiye’s reserves after last month’s terrible earthquake total barely $42 billion.
Goldman Sachs Suggests more Conventional Economic Policies
Comparatively, the central bank and the treasury own a combined short FX position, or exposure, of $260 billion. This has increased by $206 billion since the middle of 2018, mostly as a result of swaps and deposits with local banks that are FX-protected.
But, Goldman said that a return to more conventional economic policies would probably be advantageous for Türkiye in the long run. “There are major liquidity concerns involved if those two markets remain unsettled,” Goldman stated.
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