Turkey’s central bank informed local lenders that it would end FX swap auctions as of July 25, BloombergHT reported on July 24.

Data from the authority also confirmed that it had not registered any swap transactions with local banks on July 25 while the stock stood at only $121mn.

Soon the stock will be zeroed upon the maturity of the remaining sum if no new transactions areregistered.

In 2018, following the currency crisis, Turkey’s central bank launched derivative transactions to finance its interventions in the currency market.

Since the local elections held on March 31, the authority has been aggressively cutting the volume of its derivatives stock while building up its reserves thanks to portfolio inflows along with declines in FX deposits and increases in FX loans at local banks.

At its Novemer 2023 peak, the central bank’s open swap stock with local banks reached $64bn. The figure declined from $58bn at end-March to $121mn as of July 25.

Reverse swaps with local banks

Additionally, the central bank has informed local lenders that it will introduce reverse swap auctions (at spot, banks will deposit lira at the central bank in exchange for FX and gold) as a new sterilisation tool, BloombergHT reported on July 23.

The central bank stopped providing central bank money to the system via swaps (at spot, banks deposit FX at the central bank in exchange for lira, note the $121mn figure above).

However, the system is still flooded with lira liquidity. The central bank buys everything that comes from portfolio inflows. Additionally, local banks sell their excess FX, which comes from closing swaps, to the central bank.

Moreover, the central bank is paying interest to the government-instigated “KKM” accounts that are protected from exchange rate losses.

Swaps with foreign central banks

In another move to rebuild the quality of its reserves, the central bank said on July 24 that it has terminated the $5bn deposit made by the Saudi Fund for Development in 2023.

Its external liabilities have recently improved by approximately $7bn through the reduction of deposit balances, it also noted.

As a result, it is estimated that the central bank’s open swap stock with foreign counterparts has fallen to $16bn from $23bn.

Turkish central bank's swap and deposit agreements
		Total
		(mn)			Maturity
Nov-22	Central bank	$5,000	Saudi Arabia	swap		deposit	CANCELLED	Jul 2024
Jan-22	Central bank	€1,000	Azerbaijan	TCMB #swap anlaşmaları ve kullanımları: Katar $15 milyar (%100) Çin $6 milyar [%100, Yuan SDR sepetinde] BAE $5 milyar (kullanılan $2,6) G. Kore $2 milyar (kullanılan 0) TOPLAM $28 milyar (kullanılan $23,6 milyar) [2018 öncesi bilançodaki $1.5 milyara ait bir detay yok] pic.twitter.com/PxZRjGNTdX — 5 0 7 (@e507) April 7, 2022 data-sheets-hyperlinkruns="{"1":0,"2":" TCMB #swap anlaşmaları ve kullanımları: Katar $15 milyar (%100) Çin $6 milyar [%100, Yuan SDR sepetinde] BAE $5 milyar (kullanılan $2,6) G. Kore $2 milyar (kullanılan 0) TOPLAM $28 milyar (kullanılan $23,6 milyar) [2018 öncesi bilançodaki $1.5 milyara ait bir detay yok] pic.twitter.com/PxZRjGNTdX — 5 0 7 (@e507) April 7, 2022 data-sheets-value="{"1":2,"2":"swap"}">swap	6-month	deposit	Sofaz	oil fund
Jan-22	Central bank	$4,700	UAE	swap	3-year	18bn dirhem
Aug-21	Central bank	$6,370	IMF	SDR	allocation
Aug-21	Central bank	$2,000	Korea	swap	3-year	Korean won
Jun-21	Central bank	$3,600	China	swap	CYN23bn
Jan-21	Central bank	$1,400	China	swap	Chinese	yuan
May-20	Central bank	$10,000	Qatar	swap	Qatari rial	Qatari riyal
Nov-19	Central bank	$2,000	Qatar	swap	Qatari Rial
Jun-19	Central bank	$1,000	China	swap	Chinese yuan
Aug-18	Central bank	$3,000	Qatar	swap	Qatari rial

Table: Turkish central bank’s swap and deposit agreements with foreign counterparts. The entire sums are not used.

Building up reserves

From end-March, the central bank’s net FX position excluding swaps improved by $89bn from minus $74bn to a positive $15bn as of July 19.

Since July 19, the improvement has continued. As things stand, it can be said that the central bank’s reserve quality is not negative anymore.

Turkish central bank's net FX position
	A.1_FOREIGN ASSETS (Thousand TRY)	P.1_TOTAL FOREIGN LIABILITIES (Thousand TRY)	Net (A.1-P.1)	USD/TRY Buying	Net USDmn	2. Aggregate short and long positions in forwards and futures in foreign currencies	3. Other (specify)	Net (minus) swaps	Cumulative change (USD bn)
Mar 29, 2024	4,057,007,074	3,834,312,295	222,694,779	32.26	6,903	-76,653	-4,338	-74,088
Apr 30, 2024	4,107,363,595	3,743,279,647	364,083,948	32.34	11,258	-57,559	-5,986	-52,287	22
May 17, 2024	4,540,619,192	3,721,838,317	818,780,875	32.16	25,460	-43,568	-5,082	-23,190	51
May 24, 2024	4,639,784,615	3,574,706,968	1,065,077,647	32.14	33,139	-40,745	-4,729	-12,335	62
May 30, 2024	4,675,489,675	3,476,230,575	1,199,259,100	32.25	37,188	-39,291	-4,680	-6,783	67
Jun 28, 2024	4,762,091,401	3,700,003,784	1,062,087,617	32.83	32,355	-24,565	-3,264	4,526	79
Jul 19, 2024	5,152,701,184	3,816,209,032	1,336,492,152	33.00	40,495	-23,276	-1,966	15,253	89

Table: Turkish central bank’s net FX position.

Across the same period, Turkey attracted $25bn via carry trade flows. It is thought that the central bank has acquired the entire sum.

Carry Trade Flows to Turkey (estimate)
million USD	Turkish Banks Off-Balance Sheet FX Position	Turkish Central Bank's Total Swap Stock with Local Banks	Swaps Converted to Deposits	Lira-settled FX Frowards	Turkish Central Bank's Net FX Derivatives Stock with Local Banks	Turkish Banks' Swap Stock with Foreign Counterparts (estimate)	Carry Trade Flows (estimate)	Cumulative Flow
Mar 29, 2024	55,781	57,898	433	4,279	61,744	-5,963
Apr 5, 2024	53,366	53,569	433	4,269	57,405	-4,039	1,924	1,924
Apr 12, 2024	53,712	52,336	433	4,269	56,172	-2,460	1,579	3,503
Apr 19, 2024	47,020	44,495	413	3,902	47,984	-964	1,497	5,000
Apr 26, 2024	43,446	39,586	363	3,384	42,607	839	1,803	6,803
May 3, 2024	43,912	36,813	243	2,615	39,185	4,727	3,888	10,690
May 10, 2024	43,112	31,398	243	2,142	33,297	9,815	5,088	15,778
May 17, 2024	39,292	25,355	243	1,939	27,051	12,241	2,426	18,204
May 24, 2024	36,533	22,264	243	1,746	23,767	12,766	525	18,729
May 31, 2024	35,224	20,811	243	592	21,160	14,064	1,298	20,027
Jun 7, 2024	33,213	18,300	163	349	18,486	14,727	664	20,690
Jun 14, 2024	27,881	12,496	103	141	12,534	15,347	619	21,310
Jun 21, 2024	25,589	9,093	40	5	9,058	16,531	1,185	22,495
Jun 28, 2024	21,134	4,719	0	0	4,719	16,415	-116	22,378
Jul 5, 2024	20,798	2,322	0	0	2,322	18,476	2,061	24,439
Jul 12, 2024	20,813	2,351	0	0	2,351	18,462	-14	24,425
Jul 19, 2024	20,842	2,051	0	0	2,051	18,791	329	24,754

Table: Carry trade flows to Turkey.

In the same period, foreigners bought $9.7bn worth of domestic government paper and sold a net $1.3bn worth of equities. It is thought that the central bank has also acquired the net sum of about $8bn.

Weekly net flows into Turkey's lira paper urkey (estimate)
million USD	Government papers	Cumulative since end-March	Stocks		Total cumulative
Mar 22, 2024	-104		429
Mar 29, 2024	112		267
Apr 5, 2024	86	86	363	363	449
Apr 12, 2024	38	125	160	523	647
Apr 19, 2024	115	240	-143	380	619
Apr 26, 2024	604	843	-155	225	1,068
May 3, 2024	761	1,604	311	536	2,140
May 10, 2024	2,833	4,437	85	620	5,057
May 17, 2024	1,339	5,776	-233	388	6,163
May 24, 2024	1,570	7,346	-28	360	7,706
May 31, 2024	94	7,440	-529	-169	7,271
Jun 7, 2024	541	7,981	-543	-712	7,269
Jun 14, 2024	792	8,773	-439	-1,151	7,622
Jun 21, 2024	34	8,807	-158	-1,309	7,498
Jun 28, 2024	-679	8,128	-228	-1,537	6,591
Jul 5, 2024	1,418	9,546	156	-1,381	8,165
Jul 12, 2024	895	10,441	-58	-1,438	9,003
Jul 19, 2024	-700	9,741	124	-1,314	8,427

Table: Net flows into Turkey’s domestic government paper and equities.

In the same period, local lenders’ swap stock with the central bank declined by $56bn from $58bn at end-March to $2bn as of July 19. (See the carry trade table above). It is thought that the central bank has acquired the entire sum from local banks.

When $25bn from carry trade, $8bn from lira paper and $56bn from swaps are totalled up, it equals the $89bn improvement in the central bank’s net position.

The main drivers that allowed local banks to close their swaps with the central bank were the increase in FX loans (in-balance sheet FX assets up) along with the decline in FX deposits (in-balance sheet FX liabilities down).

As a result, the banks do not need to hold off-balance sheet FX assets.

FX loans increased by $20bn from $135bn at end-March to $155bn as of July 19, while FX deposits declined by $20bn from $210bn at end-March to $191bn as of July 19.