Turkey's FX-protected deposits see first decline in 8 months
The total amount of FX-protected deposits (KKM) in Turkey shrank by 39.3 billion TL last week to 3.37 trillion TL, marking a decline for the first time since January, according to the Banking Regulation and Supervision Agency (BDDK.)
This downward trend, equivalent to about $124.3 billion, happened eight months after the previous recording, illustrating the shift in economic strategy following President Tayyip Erdogan's re-election last May. The newly installed administration is intent on moving away from non-traditional policies, which includes extremely low borrowing costs. Endorsed by Erdogan in the past, such policies had caused a spike in inflation and made foreign investors wary of the Turkish markets.
The KKM accounts, designed to lure investors with promising interest rates and offer compensation for any depreciation, were once seen as a safeguard for the lira. But the recent withdrawals signify diminishing confidence in the lira's robustness. Notably, out of the $5 billion exodus, a significant portion was from investors reverting their dollar savings back into standard dollar accounts in just the last week, stirring worries about the central bank's capacity to meet the rising demand for foreign currency.
In a statement last month, the central bank governor, Hafize Gaye Erkan, confirmed that the institution had stopped leveraging its reserves to bolster the national currency. However, even with the withdrawals from the KKM accounts, the central bank still met the banks' demand for dollars.
What began as a rescue measure for the lira, attracting inflows exceeding $120 billion, the foreign exchange-protected deposit tool, is now seen as an expensive commitment for the government. Both Erkan and Finance Minister Mehmet Simsek regard the KKM program as a hurdle in adopting a regularized monetary policy.
In the 20 months since the KKM's introduction, the lira has seen a decline of over 50% against the US dollar. This substantial devaluation highlights the ongoing challenges that the central bank and policymakers face in their mission to stabilize the currency and bolster economic growth in Turkey.