Turkey Terminates Saudi Deposit, Reflects Growing Economic Confidence

On July 24, Turkey's central bank announced it terminated a $5 billion deposit transaction with Saudi Arabia, signaling increased confidence in rebuilding foreign exchange reserves independently. The move reflects Turkey's aggressive policy tightening to combat inflation and stabilize the economy.
Turkey Ends $5 Billion Saudi Deposit, Showcasing Confidence in Rebuilding Foreign Reserves Independently

According to the announcement, Saudi Arabia's deposit transaction with the Turkish central bank was terminated on July 24. This action indicates the authorities' growing confidence in reestablishing foreign exchange reserves without relying on debt from affluent allies.

Saudi Arabia had deposited $5 billion before Turkey's presidential and parliamentary elections last year. According to Bloomberg, this marked a significant shift in policymaking, as the authorities reversed years of loose policy and implemented aggressive tightening measures, primarily to alleviate persistently elevated inflation.

Bankers' calculations, based on the balance sheet data published on July 24, indicate that the Central Bank of the Republic of Turkey (CBRT) repaid the deposit to the Saudi Fund for Development (SFD) on July 23.

The transaction has been terminated in response to the bank's ongoing evaluation of its international deposit transactions. According to a statement, Türkiye's external liabilities are being diminished as part of reserve management.

"Our external liabilities have recently improved by approximately $7 billion through the reduction of deposit balances," the bank said.

According to bankers' calculations, the bank's deposit balance under external liabilities has decreased to approximately $16 billion, while the total sum of swaps conducted with other central banks is roughly $23 billion.

CBRT Rebuilds Foreign Reserves at Record Pace, Reduces External Liabilities Amid Strong Investor Sentiment

The CBRT has been able to rebuild its foreign exchange reserves at a record pace due to the significant improvement in investor sentiment and the robust demand for Turkish assets resulting from a tightening drive that has lasted for more than a year.

"Our reserves have strengthened as a result of the increased influx of foreign resources, dollarization reverse and reduced external financing needs resulting from our (medium-term economic) program," said Treasury and Finance Minister Mehmet Şimşek.

"Consequently, we are reducing external liabilities," Şimşek wrote on social media platform X.

"Our economic and financial cooperation with Saudi Arabia will continue."

The central bank has increased its benchmark policy rate by 4,150 basis points to 50% since June of last year to combat inflation, which has commenced a sustained decline and fell to 71.6% in June.

It last increased interest rates by 500 basis points in March and has since maintained its stability. However, it has pledged to tighten policy further if it anticipates that the inflation outlook will deteriorate, a hawkish stance reiterated on July 23.

Although some analysts anticipate that the central bank will delay rate cuts until the end of the year, most analysts expect that they will commence before the year concludes.

Following the March local elections, the bank amassed approximately $80 billion in reserves.

As of early July, its net reserves, which exclude transactions with commercial lenders, were approximately $15 billion. Before the elections, they had reached a record low of minus $65.5 billion.

Turkey's Central Bank Maintains High Interest Rates, Strengthens Reserves Amid Ongoing Inflation Control

The central bank has increased its benchmark policy rate by 4,150 basis points to 50% since June of last year to combat inflation, which has commenced a sustained decline and fell to 71.6% in June.

Its last increased interest rates by 500 basis points in March and has since maintained its stability. However, it has pledged to tighten policy further if it anticipates that the inflation outlook will deteriorate, a hawkish stance reiterated on July 23.

Although some analysts anticipate that the central bank will delay rate cuts until the end of the year, most analysts expect that they will commence before the year concludes.

Following the March local elections, the bank amassed approximately $80 billion in reserves.

As of early July, its net reserves, which exclude transactions with commercial lenders, were approximately $15 billion. Before the elections, they had reached a record low of minus $65.5 billion.

"Within the framework of the monetary policy, it has been decided to start sell-side Turkish lira swap auctions in order to diversify the sterilization tools," the document seen by Reuters said.

According to financiers, implementing sell-side FX and gold swap auctions will modify reserve calculations and substantially affect the lira's liquidity in the market.

The central bank's efforts to increase the currency's share in the system were the primary cause of the lira liquidity excess in the banking system, which was TL 200 billion ($6.09 billion) as of July 22.