By Ezgi Erkoyun & Nevzat devranoglu

ISTANBUL, Reuters – On Thursday the Turkish lira dropped as high as 6%, extending a four day slide following last week’s huge gains. The government was unable to persuade savers not to worry about volatility, worries about rising inflation, and unorthodox rate reductions.

Official data shows that while Nureddin Nebati, Finance Minister, said Turks dollar holdings are falling but local currency holdings rose to an unprecedented billion.

The central bank’s net currency reserves – which are its buffers against financial crises – plummeted to a nearly two-decade-low.

In four trading sessions the lira lost as high as 20%, reversed a rally of more than 50% over five days. This was due to a state scheme that protects local deposits against depreciation losses in hard currencies.

But, the data from Thursday showed that central banks intervention drove most of the lira increase last week, according to Per Hammarlund chief EM strategist at SEB.

Hammarlund stated, “(The locals), are not rushing for conversion of their dollar savings to lira.

The lira fell to 13.4 against the dollar on Thursday before rebounding to 13.00 at 1630 GMT. This was still 4.7% lower than the previous day. The lira has been on a dizzying rollercoaster ride, swinging between 18.4 and 10.25 in the past two weeks. This has led to Turks losing their savings and causing havoc with household budgets.

In September, President Tayyip Turkey sought aggressive rate cuts to help ease the currency crisis. These were part of his new economic programme that focuses on credit and exports.

Opposition lawmakers and economists called the easing dangerous given that inflation has risen above 21% and will likely soar to 30% in the coming months due to sharp lira appreciation.

Erdogan appointed Nebati, who said Wednesday that the volatility wasn’t worrying. She also predicted single-digit inflation in 2023. That is a lot more optimistic than analyst views.

Nebati stated that the government did not intervene to sell dollars or increase the lira in last week’s currency market. However, data showing that reserves fell was what economists as well as bankers believed to be evidence of state-backed support for markets.

THE THIN BUFFER

Data from the central bank showed that net international reserves fell to $8.63 Billion last week. This is their lowest level since 2002 when they were $12.16 Billion a week before. From $12.16 billion a week earlier, gross foreign reserves dropped $5.81billion to $72.56billion.

Five direct intervention notices were issued by the central bank this month in support of the lira. They are estimated to have cost $6-10 billion. The intervention notices were not issued in the past two weeks when reserves started to plummet.

Last week, the total amount of foreign currency and gold held in Turkey by locals was $238.97 trillion. After adjusting for the parity effect, holdings rose by $1.46billion while those held by individual investors fell only $136m.

Graphic: FX held by Turkish locals-https://fingfx.thomsonreuters.com/gfx/mkt/myvmnbmdlpr/FX%20held%20by%20Turkish%20locals.PNG

Erdogan’s scheme is intended to stop dollarization. The Treasury (or central bank) covers the difference between the deposit rates, foreign exchange rate and the gold rate for liras converted into new instruments.

Marek Drimal, Societe Generale’s OTC: said that the scheme was a temporary backstop. However, “market participants must see concrete steps to fix the underlying economic problems.”

Political analysts and economists warn against the possibility of inflation and an increase in the fiscal burden if the currency continues to fall.

Howard Eissenstat associate professor Middle East history, St. Lawrence University, New York State, stated that emergency measures will not provide long-term relief and could actually worsen the situation.

CNN Turk reported that Nebati said that as of Wednesday, 59.8 trillion lira (or $4.60 billion) was in protected deposits. Meanwhile, foreign investors’ foreign currencies deposits fell by $7 billion to $162 million since the scheme was first announced.

According to some analysts, Erdogan may be able to organize snap elections prior the 2023 election date by using the new scheme and raising the minimum wage 50%.

SEB’s Hammarlund foresaw that the lira will experience greater volatility in the next few weeks.

“They just pull one rabbit from the hat after the other, it’s hard to know what the next move could be.”

($1 = 12.9914 liras)