Turkish lira hit by dwindling FX reserves, confidence

ISTANBUL: Turkey's lira dipped to its weakest level in more than two weeks on Thursday on concerns over the country's dwindling net reserves, with disappointment over an economic reform plan and local election uncertainty also weighing on sentiment.

The lira weakened 1.2 percent to 5.75 against the dollar on Thursday after the central bank's international net reserves fell to $27.94 billion as of April 5, from $29.72 billion a week earlier.

Analysts say Turks converting their savings into foreign currencies have signaled a decline of confidence in the lira. However, foreign currency deposits held by locals dipped last week from a record high to $181.13 billion.

The data followed a lukewarm reaction on Wednesday to Finance Minister Berat Albayrak's package of economic reforms, notably a plan to provide 28 billion lira ($4.9 billion) to recapitalise state banks.

The banking sector was among the hardest hit by a currency crisis last year, when the lira weakened 30 percent against the dollar. The lira was at its weakest level since March 25, having lost some 8 percent of its value so far this year.

"I think the right question would be, 'Why will the (Turkish lira) appreciate?' I don't see any positive news that could support an appreciation," said Guillaume Tresca, senior emerging markets strategist at Credit Agricole.

Albayrak's plan did not alleviate market concerns and did not present anything new beyond the bank capital injection, which lacked detail, he said.

The latest dip in FX reserves sparked a drop of as much as 1.2 cents in Turkey's dollar-denominated government bonds. The country's 5-year credit default swaps (CDS) also jumped to their highest level in nearly two weeks.

Uncertainty over election results in Istanbul, which President Tayyip Erdogan said should be annulled due to irregularities, added to bearish sentiment, as did strains in U.S-Turkish diplomacy.

Initial election results show the main opposition narrowly won control of Istanbul, a major blow for Erdogan and his AK Party. The electoral board is set to rule on challenges to results across the country.

Meanwhile, Ankara warned on Wednesday that it could buy jets and additional air-defense systems from Russia if it cannot get Patriot missile shields and F-35s from Washington, its NATO ally. Washington says the Russian defense systems are not compatible with NATO systems and would compromise the security of F-35 jets Turkey is due to receive.