Turkey considers new financial instruments to hedge against inflation

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Turkey is considering a range of new financial products that would offer guarantees against losses due to inflation, according to a senior official.

This would follow a program unveiled last month to protect Turkish Lira deposits from currency volatility, a measure designed to make citizens feel more secure when holding their savings in the bank.

The scheme effectively ties the value of new special deposits to the United States dollar by promising to compensate for losses incurred as a result of exchange rate fluctuations.

The government is working on various new financial products to get the country back on track and help it meet its current account surplus target, Göksel Aşan, head of the presidency’s finance office, said in an interview. with Nikkei Asia.

“The Ministry of Treasury and Finance is working on inflation-indexed instruments,” Aşan said. “I don’t think it will be another bank deposit instrument, which would mean competing with new forex-indexed lira deposits,” he said, alluding to bonds without specifying it.

The ploy announced by President Recep Tayyip Erdoğan on December 20 reversed the decline in the pound and triggered a historic 50% rise in the value of the currency during the week through December 24.

Increase in deposits

Deposits increased by more than TL 60 billion after the announcement of the anti-dollarization plan, Aşan said, expressing his expectations that the new deposit instruments would collect TL 150 billion in lira accounts indexed to the currency. forex within a month.

“I also expect that an additional $ 5 billion will be converted to lire from standard forex deposit accounts during the same period,” he said, suggesting a total sum of $ 16 billion. at the current exchange rate.

The lira fell to an all-time low of 18.40 for the US dollar on December 20, before registering the all-time rebound on the same day. On Friday, the currency was trading at around 13.4 per dollar and closed 2021 down more than 40%.

The depreciation had made imports more expensive and followed a series of interest rate cuts, with the Central Bank of the Republic of Turkey (CBRT) lowering its policy rates by 500 basis points to 14% since September.

Annual inflation reached over 21% in November, the highest figure since November 2018, on the back of rising food and import prices. It is expected to have exceeded 30% in December, topping the level for the first time since 2003, according to polls.

Among other initiatives, work is also underway to introduce some of the approximately 5,000 tons of gold “under the mattress” into the financial system by introducing gold certificates to be exchanged for physical gold, said Aşan in Nikkei.

These gold objects are estimated by the government at some 280 billion dollars.

Asan’s remarks follow an announcement by the country’s central bank, which said it would also extend an incentive program to people who keep their savings in gold.

Erdoğan on Friday called on citizens to keep all their savings in lire and transfer their gold savings to banks, saying the recent volatility in the forex market was largely under control.

Aşan said he also expects high inflation for December when the Turkish Statistical Institute (TurkStat) announces the data on Monday, given the sharp drop in the pound last month. He expects inflation to peak in March and end the year below 17%.

Energy, rising electricity prices

Ahead of the new inflation reading, Turkey sharply hiked domestic electricity and natural gas prices on Saturday for the new year. Prices also jumped for gasoline, auto insurance and some bridge tolls.

The Energy Market Regulatory Authority (EPDK), citing high global energy inflation, said electricity prices have been increased by up to 125% for high demand commercial users and around 50% for low-demand households for 2022.

Natural gas prices jumped 25% for residential use and 50% for industrial use in January, national distributor BOTAŞ said. The price increase was 15% for generator sets.

In Istanbul, home to about a fifth of Turkey’s population of 84 million, retail prices jumped 9.65% month-over-month in December for an annual increase of 34.18%, the highest for at least a decade, the Istanbul Chamber of Commerce (ITO) mentioned. The prices of household appliances increased by more than 20% while food increased by almost 15%.

Wholesale prices in the city jumped 11.96% from November for an annual increase of 47.10%, ITO said.

Other adjustments included the 20% increase in the maximum compulsory road insurance premium, effective February 1.

Gasoline prices rose more than half a pound per liter, while diesel prices rose 1.29 TL, the Energy, Petroleum and Stations Employers Union said on Friday. -service (EPGIS).

Inflation-linked bonds can make a contribution if they are introduced, Erhan Aslanoğlu, professor of economics at Piri Reis University, told Nikkei.

Aslanoğlu said it would depend on their maturity and that they can absorb part of the dollar purchase demand.

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