Turkey’s foreign currency and gold reserves tumbled $17bn in the six weeks before Sunday’s general election as Recep Tayyip Erdoğan’s government sought to prop up the economy and lira ahead of the tightly contested polls.
The central bank’s foreign currency war chest dropped by $9.5bn from the end of March to May 12, while its gold holdings fell $7.9bn, according to Financial Times calculations based on official data. Both figures represented a decline of 15 per cent.
The declines come as investors and analysts are becoming increasingly concerned about the unconventional economic programmes the Erdoğan government has used to stabilise the economy. Those fears have only been exacerbated since Erdoğan’s strong showing in Sunday’s first-round vote put him in pole position for another five years as president.
The soaring demand for gold, meanwhile, was driven local buyers seeking a safe asset to protect their savings at a time of acute inflation and a lira that is trading near record lows.
“There’s a growing demand for dollars and gold in the market,” said Enver Erkan, chief economist at Istanbul-based brokerage Dinamik Yatırım Menkul Değerler. “The central bank is doing whatever it can, but that’s not a sustainable approach, because there’s not much left in the tank, in terms of reserves.”
The general election was seen as a potential economic turning point for Turkey, with Erdoğan’s main challenger Kemal Kılıçdaroğlu promising a series of economic reforms.
However, Erdoğan’s unexpectedly strong first round — he failed to secure an outright majority but scored a much bigger share of the vote than his rival — has heaped pressure on the lira and knocked other Turkish assets ahead of the May 28 runoff vote.
Foreign currency reserves registered $53.2bn as of May 12, two days before Sunday’s election, but those figures include tens of billions of dollars borrowed from domestic banks through short-term agreements known as “swaps”. Reserves had been $75bn at the end of 2022. Tim Ash at BlueBay Asset Management described the fall in reserves as “huge”.
Fitch Ratings told the Financial Times this week that pressure on foreign currency reserves increased as the government took a strongly pro-growth approach before the elections, and because these assets are helping to finance Turkey’s near-record current account deficit. Economists also say the central bank has used reserves for years to slow the currency’s fall.
Turkish authorities have made it more difficult for local consumers and businesses to purchase foreign currencies, as part of Erdoğan’s attempt to prop up the lira and reduce the use of the dollar and euros across the $900bn economy.
Many are turning to gold as a way to protect their savings, against a lira that has fallen 60 per cent against the dollar over the past two years to a record low, and persistently high inflation that has diminished the currency’s purchasing power at home.
Turkey suspended gold imports after the earthquake since imports to meet retail investor demand were driving up its current account deficit. The central bank has been drawing down on its reserves to supply the domestic market.
Record levels of gold purchases by central banks around the world were the driving force behind the metal’s rally since November, with prices rising from $1,615 per troy ounce to about $2,000.
Turkey’s central bank was the largest reported purchaser of bullion in the official sector last year, growing its holdings by 148 tonnes, according to the World Gold Council, an industry-funded group.
However, the bank abruptly turned seller in March, with outflows of 15 tonnes of gold followed by a further 81 tonnes in April, the WGC said, amid a surge in demand in Turkey for bars and coins. The value of Turkey’s gold reserves was $44.3bn on May 12, central bank data shows.
