Signs of increasing pressure on interest rates in the Treasury’s cash balance data

Being a leading indicator for Central government budget data, Treasury’s cash balance gave a deficit of TRY 30.8 billion (USD 4.5 billion) in July up TRY 4 billion from June figures. Cash balance has been in a row of negative territory since February 2020.

Revenues rose by 42% m/m to TRY 87 billion in July while expenditures rose by 32% to TRY 118,2 billion.

Year-to-date aggregate cash deficit hit to top to TRY 140 billion in the first seven months of 2020 alone while total cash deficit recorded TRY 131 billion in 2019 and TRY 70 billion in 2018.

Source: Turkey Data Monitor, Ministry of Treasury and Finance

Another importance of cash balance is that it provides information about the sources of financing of cash deficit. Budget deficit of TRY 30,8 in July was financed with net borrowing of TRY 48.9 billion and the change in exchange rate of TRY 1.2 billion in the Cash/Bank item, and lastly the excess amount of TRY 18.2 billion was transferred to the deposit account of Treasury in the Central Bank of Turkey (CBT).

The main financing source of the cash deficit is the borrowing item. Let’s focus on borrowing strategy of the Treasury in July:

. The Treasury being a net payer in foreign borrowing since March 2020 did not borrow from abroad while paying its foreign debt of TRY 0.4 billion in July. For sure, this is due to the lower level of foreign debt payments. The first higher foreign debt payment of USD 4.6 billion is due on March 2021 while USD 1.3 billion of foreign debt is due on June 2021.

. The Treasury borrowed a debt of TRY 64.2 billion from domestic markets July while paying domestic debt of TRY 14.9 billion. Thus, net domestic borrowing amounted to TL 49.3 billion in July.

Source: Turkey Data Monitor, Ministry of Treasury and Finance

As it is understood, the Treasury concentrated on domestic borrowing in a current time of decreasing revenues, soaring expenditures, and depreciation of Turkish lira due to pandemic. It is quite reasonable that the Treasury concentrates on domestic borrowing to decrease the currency risk in a time of CBT melting its foreign exchange reserves so that Turkish lira not to depreciate.

What are the costs of CBT melting its foreign exchange reserves?

. Opening the credit taps mainly through public banks at lower interest rates to increase domestic demand,

. Returns on deposits and government bonds being under inflation rate (which is called as negative real rates)

. CBT financing the banks at the rates below policy rate (which makes the deposit rates being under inflation rate),

. Latest implementations jeopardizing asset quality of banking sector, and lastly

. All of the factors counted above combined with concerns on second wave of pandemic resulted in

.. interest rate of 2-year government bond increased above 14% on August 11th from the levels of 9% seen in the beginning of July,

.. USD/TRY increased above 6% and EUR/TRY increased above 5% compared to the levels at the end of July, and

.. Turkey’s 10-year CDS premium surged above 600.

CBT responded all these developments above as

. reducing liquidity limits of primary banks to half of their current limits on August 7th,

. increasing funding rate of banks to 8.25%,

. reducing liquidity limits of primary banks to zero on August 11th.

Besides, in its announcement dated August 6th, BDDK (Banking Regulation and Supervision Agency) announced that international development banks are exempted from the limitations of accessing TRY in case of fulfilling specified conditions.

CBT will convene for monetary policy meeting on August 20th. Bank’s policy rate, which is 1-week repo rate, is at 8.25%. CBT has been holding policy rate since May 2020 when CBT decreased the policy rate by 50 bps to 8.25%. Considering latest liquidity tightening measures, any rate hike seems uncertain as for now. Even if CBT decides to hold the policy rate next week, steps should be taken to restore confidence in the current environment where the budget deficit continues to increase. Otherwise, even if not in September, the pressure on bond yields may increase in October, when the Treasury’s redemptions will increase twice compared to September, as the Treasury tries to roll over its increasing domestic debt by issuing bonds. This may force the CBRT to raise interest rates drastically sooner or later. We witnessed drastic rate hikes when CBT raised policy rate from 4.5% to 10.0% in January 2014, from 8.0% to 16.5% in June 2018, from 17.75% to 24,0% in September 2018.

Source: Turkey Data Monitor

Fulya Gürbüz, Ph.D.

Next week’s agenda: Confidence indices, capacity utilization, Fed’s policy rate decision, inflation report, foreign trade, and tourism

July 27, 2020, Monday

July manufacturing sector capacity utilization rate (CUR), real sector confidence index (RSCI) and sectoral confidence indices will be released. Following easing of COVID-19-led-closures in May, all these macro-economic indicators started to rise in May and got momentum further in June. A hint regarding July figures came with the IHS Markit PMI flash figures of Turkey’s main trade partner Eurozone. Flash Eurozone manufacturing PMI figures rose by 3,7 points to 51,1 in July compared to previous month. Figures above 50 indicate growth in the sector.  From the perspective of the supply chain, this may be a sign for a possible improvement in Turkey industrial production in July.  We will focus on relevant hints in CUR and RSCI figures to be released on Monday. Sectoral confidence indices, on the other hand, will help us understand the course of domestic demand.

July 29, 2020, Wednesday

Fed will release its policy rate decision. The target rate, which is the policy rate, is at the range of 0-0.25 percent since March 15, the date coronavirus declared pandemic. Fed is expected to hold the policy rate unchanged in July FMOC meeting. There are two developments supporting this expectation. Firstly, the Beige Book published on July 15, pointed to improvement in economic activity with a lower performance compared to the period before Covid-19, lower wages despite decrease in unemployment, and roughly flat input and selling prices. Secondly, the latest speech made by Fed governors in July belongs to Lael Brainard. Brainard stated that downside risks are maintained, the second wave of COVID-19 would further increase uncertainties, and financial and monetary support remain important. Lastly, Fed expanded loan facilities in July to revive economic activity and maintain financial support.

Central Bank of Turkey (CBT) will release second quarter Inflation Report. CBT decreased its inflation projection for the end of 2020 from 8.2% to 7.4% and kept its inflation projections for both 2021 and medium term at 5.4% and 5% respectively in its first quarter Inflation Report. Furthermore, CBT hold its policy rate at 8.25% at monetary policy committee meeting on July 23, stressing on upward risks regarding its year end inflation projections (pandemic-related rise in unit costs leading to an increase in the trends of core inflation indicators, and food inflation). We will focus on inflation and economic projections of CBT in 2Q20 Inflation Report. 

SAMEKS (purchasing managers indices) figures for July will be released. SAMEKS is one of the main indicators showing the tendency in both industrial and services sectors. SAMEKS Composite Index rose by 3.5 points m/m to 49.3, SAMEKS Services Sector Index rose by 2.1 points m/m to 46.3, and SAMEKS Industrial Sector Index rose by 7.0 points m/m to 56.7 in June. Levels above 50 points to growth in the sector compared to the previous month.

Tourism figures for June will be released. The sector has been contracting since March 2020 when Covid-19 burst.

Foreign trade figures of June will be released. Both exports and imports increased by 12% and 13% m/m respectively in May. According to Turkish Exporters Assembly (TİM) exports rose by 35% m/m to 13,5 billion dollars in June. Furthermore, according to central government budget figures of June pointed out a robust growth in gold excluded import figures.

July 30, 2020, Thursday

Economic Confidence Index for July to be released. The index rose by 11.8 points m/m to 73.5 in June. Being one of the parameters of Economic Confidence Index, TUİK Consumer Confidence Index fell by 1.8 points to 61.0 in July. In calculation of the Economic Confidence Index, the following parameters are considered: Consumer Confidence Index, Real Sector Confidence Index, and Sectoral (Services Sector, Retail Trade Sector, and Construction Sector) Confidence Indices. Historically, the Economic Confidence Index has a high correlation with the Services Sector Confidence Index and moves in parallel with both the Real Sector Confidence Index and the Retail Trade Sector Confidence Index. Therefore, the confidence indices to be released on Monday will help us to understand the course of the Economic Confidence Index in July.

Fulya Gürbüz, Ph.D.