Forex held by Turks reaches record high as lira confidence declines

ANKARA: Total foreign exchange, including precious metals, held by Turkish citizens and institutions rose to a record high of $171.8 billion as of March 8, data from the central bank showed on Thursday, signalling a decline of confidence in the lira.

Turkey's lira lost nearly 30 percent of its value against the dollar last year on concern over the central bank's independence and worsening ties with Washington.

Turkey has also been faced with consistently high inflation, which stood at 19.67 percent in February even after the central bank raised its policy rate by a total of 11.25 percentage points to 24 percent last year.

The forex deposits and funds of local individuals have risen steadily over the past 5 1/2 months. Total forex deposits in Turkey's banking system currently exceed 50 percent of all deposits, according to central bank data.

The long-term trend of increasing dollarisation is a signal of a decline in confidence in the lira as a store of value, said Jason Tuvey, senior emerging markets economist at Capital Economics.

Last year's currency crisis raised worries over the ability of companies to service their debt and over the effect on Turkish banks.

"The more widespread that dollarisation becomes, the risk of problems emerging in the banking sector will multiply," Tuvey said, adding that the biggest threat would a shock that triggered the withdrawal of forex deposits.

"In order to meet withdrawal requests, banks would be forced to draw down their FX assets," he said.

While the government emphasises growth in its decisions, inflation needs to come down to restore confidence in the lira, said Durmus Yilmaz, the deputy leader of the opposition Iyi Party and a former central bank governor.

"The main point is that we cannot get rid of this dollarisation trouble unless there is a real fight against inflation," he said.

Monetary policy would not be effective as dollarisation grew, Yilmaz said, because the central bank cannot regulate foreign currencies.

The central bank's gross forex reserves dipped to $76.963 billion in the same week, from $79.096 billion a week earlier, the data also showed.