Turks wary of ‘Erdogan dollars’ despite tough sales

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Hours after President Recep Tayyip Erdogan announced a new program that promised to protect savers from the volatility of the Turkish lira’s value, state-owned Halkbank began urging customers to trust the national currency. .

In an ad skillfully performed to catchy Ottoman-inspired music, a well-known TV actor accompanies a young friend through a museum exhibit and tells him that just like the Turkish flag, the Turkish language and parliament represent pride. of the country, “the Turkish lira is our power”.

Erdogan hopes the message – combined with an attractive new investment proposal – will persuade millions of Turks to turn their backs on dollars and gold and put their savings into lire. The currency, which had lost 50% against the dollar before its announcement, had its strongest trading day in decades in the wake of the news, although it came with the help of intervention by several. billion dollars from the country’s central bank.

On the streets of Ankara, the country’s capital, Turks were unsure of the two new state-backed financial products, the government’s latest plan to bolster their shabby currency.

The first proposes to protect the lira savings by indexing it to the exchange rate, the Treasury compensating savers if the fall in the lira exceeds the interest rate offered on their account. A second initiative, supported by the central bank, offers similar incentives to savers wishing to convert their foreign currency savings into lira.

Melek, a housewife who is a longtime supporter of Erdogan’s ruling AKP party, said she would stay away. “It’s too complicated for me, I wouldn’t consider it,” said the 60-year-old, who prefers to keep her gold savings at home instead.

With the programs due to be rolled out in a few days, analysts are wondering not only about the scale of participation but also about the impact on inflation and on public finances.

“These are not typical measures you would see in other countries to stabilize the currency,” said Maxim Rybnikov, director of sovereign ratings at the S&P rating agency. “For the government and the central bank as the counterparties financing the program, depending on the evolution of the foreign exchange market, the cost could be quite significant.”

The plans aim to tackle a long-standing problem. For decades, households have been reluctant to save in lire due to high inflation and volatile currency. Turkish banks allow savers to open accounts in dollars, euros or precious metals. Billions of dollars of gold are also being kept “under the pillow” in people’s homes, according to government officials.

The trend towards dollarization, as economists call it, has been exacerbated during periods of pound volatility.

Foreign currency holdings have reached a record share of over 60% of total deposits in the banking system in recent weeks after Erdogan, a longtime opponent of high interest rates, ordered the central bank to repeatedly reduce the cost of borrowing despite soaring inflation.

Government officials are optimistic about the product’s appeal, in particular, to those who currently hold money in lire, arguing that there is little downside risk for savers. “Anyone who is already in Turkish Lira deposits will convert to this,” said a person familiar with how the program works. “It might take a little while. . . but the Turks adapt really very quickly to the new instruments.

But with deposit rates below the current inflation rate, Emre Akcakmak, managing director of Greenwest Consultancy in Dubai, warned that “unless the pound depreciates even more than the rate of inflation, savers will lose out. relative to inflation “.

Some Turks may also be reluctant to commit to a minimum three-month deadline which penalizes those who withdraw their money too early. Data from the country’s banking regulator shows that 35% of the 1.1 trillion lira of local currency deposits held by individuals in Turkish banks in October were in accounts with maturities of one month or less.

With inflation expected to exceed 30 percent in the coming months, US investment bank Goldman Sachs, meanwhile, argued that any household with access to loans at rates close to the key US rate. 14 percent central bank “still has the incentive to borrow to buy real assets or currencies.” This would continue a recent trend that has seen Turks take advantage of cheap credit to accumulate other assets, including homes, cars and cryptocurrencies.

For now, the Turks are still taking stock of the new offer.

Mehmet, a tailor, saw the benefits of the program because the exchange rate was so volatile that it was “not clear what the dollar rate will be” overnight.

A branch manager of a commercial bank in Ankara said she received an influx of calls from customers regarding the new products,

The bank manager, who asked not to be named, said there was a sense of “relief” among some of her clients that the currency’s free fall had been halted, although she said that many still did not know whether to entrust their money to New Products. She said: “I think it will take a few days for clients to decide.”

A Turkish analyst at a foreign financial institution, who requested anonymity, said the fundamental reason citizens continued to prefer foreign currencies was that they did not trust the government’s economic policies. “Why hold Erdogan dollars when you can hold real dollars?” “

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