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Turkey faces risk of currency uncertainty ahead of 2023 elections, warns Goldman

Kitco News

(Kitco News) After years of currency reserve depletion, Turkey could be at risk of currency turmoil ahead of the country's election on May 14, warned Goldman Sachs.

"The current market uncertainty poses significant risks, in our view," Goldman said in a note.

The risk increases if savers fear more conventional economic policies under a new government. That could trigger volatility in the FX market, Goldman said Wednesday.

Even though this is not the firm's base-case scenario, it is still a significant concern.

"Given the short-term nature of the instruments, time is unlikely to be on the authorities' side," the bank's analysts said. "Hence, we believe there will need to be interim solutions."

Offering local bank FX swaps could be one solution. Another would be trying to convince savers with cash deposited in depreciation-protected bank accounts to keep calm. These types of accounts were first introduced in 2021 to help stop the lira's depreciation.

If that does not work and volatility emerges, the lira will fall even further. And making things worse is Turkey's depletion of currency reserves, according to Goldman.

The bank noted that if illiquid assets like gold, bilateral swap lines and IMF Special Drawing Rights were to be excluded, Turkey's reserves would be just $42 billion.

Last year, Turkey saw a tremendous appetite for gold as local investors embraced the precious metal amid high inflation, currency devaluation, and economic instability.

Gold imports accounted for $20.4 billion in 2022, which weighed heavily on the current account deficit of $48.8 billion — the largest since mid-2018.

According to the World Gold Council data, the country's central bank was also the most prominent official gold buyer in 2022, buying 148 tonnes.

The appetite for gold has remained elevated at the start of the year, despite the country's attempts to curb high gold imports.

Turkey imported 58.3 tonnes of gold from Switzerland worth $3.6 billion in January — the largest amount in any month on record going back to 2012. The Swiss monthly gold exports to Turkey were never higher than 34 tonnes before January.

Turkey dealt with challenging economic conditions in 2022 as inflation accelerated to 85% before slowing to 64% in December. Turkey's central bank was also one of the few that cut rates in 2022, taking the key interest rate from 14% to 9%.

And analysts say that the recent devastation caused by a series of earthquakes in the region that killed more than 45,000 people could deepen economic turmoil in the country.

Turkish President Recep Tayyip Erdogan announced the date of the 2023 election on Wednesday. "This nation will do what is necessary on May 14, God willing," Erdogan said in a speech.

This means that Erdogan is sticking to his earlier election timetable despite the damage created by the February earthquakes.

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