Turkey and Qatar extend their currency swap deal

The Central Bank of Turkey has announced an extension of the local currency swap agreement signed with Qatar in the currency crisis that Ankara faced in August 2018, according to a press release issued Wednesday by the institution available on its website. The country headed by Recep Tayyip Erdogan will be able to obtain up to 10 billion dollars in reserves to shore up the position of the lira, which registered the lowest value in its history in early May.  

The maximum exchange limit for the Qatari riyal and the Turkish lira between the two countries' central banks was set at US$5 billion in August 2018. Following the update of the agreement, it will now be up to $15 billion. The lack of dollar reserves to protect the Turkish lira during the coronavirus crisis worries investors. The deal aims to “facilitate bilateral trade in respective local currencies and to support financial stability of the two countries,” Turkey’s central bank said. 

Economist Cem Baslevent, a professor at Istanbul Bilgi University, questions whether this new agreement with Qatar aims to facilitate bilateral trade, as Turkish exports to this Gulf monarchy only amount to $1.2 billion and imports are even lower, he said on his Twitter account.   

Turkey's net foreign exchange reserves have fallen from $40 billion to $26 billion this year and its public debt is $168 billion. The government is seeking overseas partnerships to obtain financing to balance the books, Reuters reported last week. Analysts fear a new currency crisis similar to that of August 2018, when the lira lost half its value. There have been talks with Japan and the UK to set up new currency exchanges.   

Turkish authorities have tried to strengthen the local currency and prevent its devaluation since the last local elections, but the efforts have not been effective due to the costs of the country's expansive foreign policy, the continued cuts in interest rates and now the spread of the coronavirus. The health and economic crisis caused by COVID-19 is forcing the Turkish regulator to expand measures to sustain the value of the currency.   

The reduction of foreign currency reserves scares investors, who are concerned that Turkey may not have enough foreign currency in case international markets stop lending to the country. "The main concern is that there will be an upsurge in foreign debt repayments, while the tourism sector is not in a position to attract flows due to the standstill in international travel," Kaan Nazli of investment firm Neuberger Berman told Bloomberg. 

The Canadian consulting firm TD Securities warned last April that the country could deplete its total foreign exchange reserves in the third week of July or September if the Central Bank continues with this procedure.  "It is likely that the country will impose strict capital controls or seek international support before running out of reserve liquidity," Cristian Maggio, head of emerging market research at TD Securities, told Bloomberg. Finance Minister Berat Albayrak was trying to reassure investors in early May that the country still has foreign exchange reserves. He also dismissed the authorities' plans for capital controls.