## wpiea2023132-print-pdf ## Source details **Canonical URL:** [wpiea2023132-print-pdf](https://www.imf.org/-/media/files/publications/wp/2023/english/wpiea2023132-print-pdf.pdf) ## Other formats - [Markdown version](/-/media/files/publications/wp/2023/english/wpiea2023132-print-pdf.pdf.md) - [Structured JSON version](/-/media/files/publications/wp/2023/english/wpiea2023132-print-pdf.pdf.json) --- ### Executive Summary - Türkiye is a heavily “dollarized” economy with large foreign currency (FX) mismatches across institutional sectors and with non-residents. - The paper combines CBRT, Turkstat, and BRSA data to build an aggregate FX exposure picture and explores sectoral interlinkages. - Since the start of the pandemic, the overall net FX position of the economy deteriorated and FX risk shifted from the private to the public sector. - In 2020, the central bank net FX position deteriorated by around US$66 billion as it undertook foreign exchange intervention to support the lira. - The central bank’s weakened position reduced its policy space, increased vulnerability to exchange rate depreciations and FX liquidity shocks, and strengthened interlinkages with banks. - Non-financial corporations (NFCs) have significantly deleveraged in FX since their 2018 peak but remain a systemic source of liquidity and asset-quality risk to banks. - Households hold the largest positive FX position (mainly FX deposits) and are effectively hedged against direct depreciation effects; households’ dollarization peaked in late 2020 and has since largely reversed. - The economy-wide non-equity, FX-only net international investment position was minus US$150 billion (14 percent of GDP) as of end-2022. ### FX balance sheets by sector - Households - Largest positive FX position, mainly FX deposits in banks and FX loans to NFCs (often owner/family lending). - 2009 prohibition on lending to households in foreign currency means households virtually have no FX liabilities. - Households hold deposits in the public-guaranteed FX-protected lira deposit scheme, introduced at the end of 2021 (not captured in the database). - Households’ ‘long’ FX position provides stability against direct lira depreciation effects. - Non-financial corporations (NFCs) - Large negative net FX position driven by significant FX loans from domestic and foreign banks. - NFC nominal FX indebtedness has fallen significantly to around half of its peak in 2018 due to regulation reducing unhedged FX borrowing. - Real depreciation of the lira has increased the real burden of FX debt on NFCs. - FX liquidity risk is mitigated by a high share of FX deposits on the asset side relative to short-term debt; many large NFCs are exporters providing a natural FX hedge. - Despite a weakening real exchange rate, corporate profit margins remained robust and insolvency rates remained low. - Banks - Prohibited from holding large net FX positions after early-2000s crisis; banks are well hedged against direct exchange rate shocks. - Banks have the largest gross FX balance sheet, intermediating household and NFC deposits to the rest of the economy. - Banks hold significant assets at the central bank (deposits and off-balance sheet FX-TL swaps); offshore swaps were gradually prohibited and replaced by CBRT swaps, increasing the nexus between banks and the central bank. - General government - Holds more FX liabilities (mainly Eurobonds) than FX assets; Eurobonds are held by foreigners and domestic banks. - Negative net FX position exposes the government to real exchange rate shocks. - FX debt as a share of GDP is low compared to peers, reflecting Türkiye’s relatively low public debt stock. - Central bank (CBRT) - Since March 2020, the central bank has had a negative net FX position. - Most liabilities are FX deposits from the banking system and TL-FX bank swaps. - Gross international reserves have not fallen significantly recently, but net international reserves (NIR) have steadily deteriorated and turned slightly negative in May 2023. - “Core” NIR, after removing other domestic claims on the central bank, is deeply negative. ### Combining balance sheets (economy-wide) - Consolidating sectoral FX positions yields a large negative economy-wide net FX position of minus US$150 billion (14 percent of GDP) as of end-2022—equivalent to the non-equity, FX-only NIIP. - The household sector provides virtually all domestic net FX to the system, which is insufficient to offset FX debtor positions of NFCs, the general government, and the central bank; the remainder is financed by external creditors. - The official non-equity, all-currency NIIP is minus US$165 billion; the difference arises from lira-denominated assets and liabilities plus dataset discrepancies. - Since the start of the pandemic: - The central bank’s net FX position weakened by around US$70 billion as FX assets were sold in large amounts in mid-2020 to support the lira. - NFCs used relatively inexpensive lira financing to reduce FX debt and build FX deposits, improving their net FX position. - Household dollarization increased as inflation eroded lira deposits, peaking in late 2020, and later largely reversed partly due to the public-guaranteed FX-protected lira deposit scheme. - The change in the overall total economy position over this period—around minus US$35 billion—can be viewed as residual financing for the current account deficit after FDI, net errors and omissions and net lira-denominated asset flows are netted out. ### Interlinkages and network structure - Network analysis (Eigenvector centrality) is used to capture sectoral influence, considering both FX creditors and debtors. - Key structural observations: - Households and general government are relatively detached from the FX network despite large net positions: households mainly credit banks; government mainly borrows from the rest-of-the-world. - Banks play an important intermediation role, with equal importance as a creditor and debtor; banks’ net FX position is tiny. - The central bank, NFCs, and the rest-of-the-world are highly interlinked with each other and with banks. - Households’ creditor role increased and peaked in early 2021 as dollarization rose; household FX deposits became a more important funding source for banks, allowing banks to reduce external financing exposure. - NFCs’ net position improved, but centrality metrics show NFCs remain important FX borrowers because they borrow from multiple sectors. - The central bank switched from a ‘long’ to a ‘short’ net FX position; rebuilding reserves after the 2020 sell-off generated new liabilities with the rest-of-the-world and domestic banks through swaps and FX deposits, increasing the central bank’s importance as a net FX debtor. - Increased central bank–bank interlinkages, combined with the central bank’s negative net FX position, raise system-wide FX liquidity risks. ### Central bank actions and systemic effects - Implicit support of the private sector could have prevented a more costly adjustment when economic activity was already extremely weak. - These actions also weakened the central bank, reduced its policy space, and increased FX mismatches. - Not only has the overall FX position of the economy weakened since the start of the pandemic, but risk has also shifted from the private to the public sector. - With a large negative net FX position, the central bank is vulnerable to exchange rate depreciations and shocks to FX liquidity. - The central bank’s scope for policy intervention has shrunk, as its ability to intervene in FX markets in times of instability has diminished. - Interlinkages between the central bank and banks have grown; combined with the central bank’s negative net FX position, this increases FX liquidity risks within the economy. ### Non-financial corporations (NFCs) and remaining risks - NFCs, despite recent significant FX deleveraging, remain a source of risk. - Supported by regulation to reduce unhedged FX borrowing, the NFC net FX position has declined significantly since its peak in 2018. - NFCs remain a central part of the FX network and pose: - Liquidity risks for banks — and hence the central bank — if they choose to withdraw FX deposits. - Asset quality risks to banks if they have problems servicing their FX debt. - These points indicate NFCs’ continued systemic importance and the need for ongoing careful monitoring. *Prepared by Alex Pienkowski, IMF Working Paper WP/23/132* ### Section 1 ### Foreign Currency Balance Sheets in Türkiye Exposure and Interconnectedness ### Executive Summary - Türkiye is a heavily “dollarized” economy with large foreign currency (FX) mismatches across institutional sectors and with non-residents. - The paper combines CBRT, Turkstat, and BRSA data to build an aggregate FX exposure picture and explores sectoral interlinkages. - Since the start of the pandemic, the overall net FX position of the economy deteriorated and FX risk shifted from the private to the public sector. - In 2020, the central bank net FX position deteriorated by around US$66 billion as it undertook foreign exchange intervention to support the lira. - The central bank’s weakened position reduced its policy space, increased vulnerability to exchange rate depreciations and FX liquidity shocks, and strengthened interlinkages with banks. - Non-financial corporations (NFCs) have significantly deleveraged in FX since their 2018 peak but remain a systemic source of liquidity and asset-quality risk to banks. - Households hold the largest positive FX position (mainly FX deposits) and are effectively hedged against direct depreciation effects; households’ dollarization peaked in late 2020 and has since largely reversed. - The economy-wide non-equity, FX-only net international investment position was minus US$150 billion (14 percent of GDP) as of end-2022. ### Introduction - Balance sheet mismatches (maturity, currency, capital structure) are a historical source of vulnerability in emerging markets and can spill over into other sectors and external crises. - The analysis excludes equity holdings (not fixed FX claims) and excludes non-bank financial institutions (pension, insurance, money market funds). - The dataset links whom-to-whom relationships where possible but contains some inconsistencies (NFC liabilities to banks do not exactly match banks’ assets from NFCs). - Structure of paper: Section B—sectoral FX balance sheets; Section C—economy-wide consolidation and changes; Section D—network interlinkages; Section E—conclusions on risk. ### FX balance sheets by sector - Households - Largest positive FX position, mainly FX deposits in banks and FX loans to NFCs (often owner/family lending). - 2009 prohibition on lending to households in foreign currency means households virtually have no FX liabilities. - Households hold deposits in the public-guaranteed FX-protected lira deposit scheme, introduced at the end of 2021 (not captured in the database). - Households’ ‘long’ FX position provides stability against direct lira depreciation effects. - Non-financial corporations (NFCs) - Large negative net FX position driven by significant FX loans from domestic and foreign banks. - NFC nominal FX indebtedness has fallen significantly to around half of its peak in 2018 due to regulation reducing unhedged FX borrowing. - Real depreciation of the lira has increased the real burden of FX debt on NFCs. - FX liquidity risk is mitigated by a high share of FX deposits on the asset side relative to short-term debt; many large NFCs are exporters providing a natural FX hedge. - Despite a weakening real exchange rate, corporate profit margins remained robust and insolvency rates remained low. - Banks - Prohibited from holding large net FX positions after early-2000s crisis; banks are well hedged against direct exchange rate shocks. - Banks have the largest gross FX balance sheet, intermediating household and NFC deposits to the rest of the economy. - Banks hold significant assets at the central bank (deposits and off-balance sheet FX-TL swaps); offshore swaps were gradually prohibited and replaced by CBRT swaps, increasing the nexus between banks and the central bank. - General government - Holds more FX liabilities (mainly Eurobonds) than FX assets; Eurobonds are held by foreigners and domestic banks. - Negative net FX position exposes the government to real exchange rate shocks. - FX debt as a share of GDP is low compared to peers, reflecting Türkiye’s relatively low public debt stock. - Central bank (CBRT) - Since March 2020, the central bank has had a negative net FX position. - Most liabilities are FX deposits from the banking system and TL-FX bank swaps. - Gross international reserves have not fallen significantly recently, but net international reserves (NIR) have steadily deteriorated and turned slightly negative in May 2023. - “Core” NIR, after removing other domestic claims on the central bank, is deeply negative. ### Combining balance sheets (economy-wide) - Consolidating sectoral FX positions yields a large negative economy-wide net FX position of minus US$150 billion (14 percent of GDP) as of end-2022—equivalent to the non-equity, FX-only NIIP. - The household sector provides virtually all domestic net FX to the system, which is insufficient to offset FX debtor positions of NFCs, the general government, and the central bank; the remainder is financed by external creditors. - The official non-equity, all-currency NIIP is minus US$165 billion; the difference arises from lira-denominated assets and liabilities plus dataset discrepancies. - Since the start of the pandemic: - The central bank’s net FX position weakened by around US$70 billion as FX assets were sold in large amounts in mid-2020 to support the lira. - NFCs used relatively inexpensive lira financing to reduce FX debt and build FX deposits, improving their net FX position. - Household dollarization increased as inflation eroded lira deposits, peaking in late 2020, and later largely reversed partly due to the public-guaranteed FX-protected lira deposit scheme. - The change in the overall total economy position over this period—around minus US$35 billion—can be viewed as residual financing for the current account deficit after FDI, net errors and omissions and net lira-denominated asset flows are netted out. ### Interlinkages - Network analysis (Eigenvector centrality) is used to capture sectoral influence, considering both FX creditors and debtors. - Key structural observations: - Households and general government are relatively detached from the FX network despite large net positions: households mainly credit banks; government mainly borrows from the rest-of-the-world. - Banks play an important intermediation role, with equal importance as a creditor and debtor; banks’ net FX position is tiny. - The central bank, NFCs, and the rest-of-the-world are highly interlinked with each other and with banks. - Households’ creditor role increased and peaked in early 2021 as dollarization rose; household FX deposits became a more important funding source for banks, allowing banks to reduce external financing exposure. - NFCs’ net position improved, but centrality metrics show NFCs remain important FX borrowers because they borrow from multiple sectors. - The central bank switched from a ‘long’ to a ‘short’ net FX position; rebuilding reserves after the 2020 sell-off generated new liabilities with the rest-of-the-world and domestic banks through swaps and FX deposits, increasing the central bank’s importance as a net FX debtor. - Increased central bank–bank interlinkages, combined with the central bank’s negative net FX position, raise system-wide FX liquidity risks. ### Conclusion - The central bank sell-off of reserves in 2020 (net FX position deterioration reported as around US$66 billion in one section and around US$70 billion in other sections) likely supported other sectors and financed part of the current account deficit, while also allowing NFCs and households to improve their net FX positions. - These interventions, while potentially preventing a more costly adjustment during a period of weak economic activity, weakened the central bank, reduced its policy space, and increased FX mismatches and liquidity risk within the economy. - NFCs remain a source of risk despite significant deleveraging; continued monitoring is needed given their systemic importance for bank liquidity and asset quality. - The large negative economy-wide FX position leaves Türkiye vulnerable to balance sheet effects from exchange rate shocks and FX liquidity shocks. *Prepared by Alex Pienkowski, IMF Working Paper WP/23/132* ### Section 2 ### wpiea2023132-print-pdf - Section 2 ### Central bank actions and systemic effects - Implicit support of the private sector could have prevented a more costly adjustment when economic activity was already extremely weak. - These actions also weakened the central bank, reduced its policy space, and increased FX mismatches. - Not only has the overall FX position of the economy weakened since the start of the pandemic, but risk has also shifted from the private to the public sector. - With a large negative net FX position, the central bank is vulnerable to exchange rate depreciations and shocks to FX liquidity. - The central bank’s scope for policy intervention has shrunk, as its ability to intervene in FX markets in times of instability has diminished. - Interlinkages between the central bank and banks have grown; combined with the central bank’s negative net FX position, this increases FX liquidity risks within the economy. ### Non-financial corporations (NFCs) and remaining risks - NFCs, despite recent significant FX deleveraging, remain a source of risk. - Supported by regulation to reduce unhedged FX borrowing, the NFC net FX position has declined significantly since its peak in 2018. - NFCs remain a central part of the FX network and pose: - Liquidity risks for banks — and hence the central bank — if they choose to withdraw FX deposits. - Asset quality risks to banks if they have problems servicing their FX debt. - These points indicate NFCs’ continued systemic importance and the need for ongoing careful monitoring. *Source: wpiea2023132-print-pdf - Section 2* --- _Source: https://www.imf.org/-/media/files/publications/wp/2023/english/wpiea2023132-print-pdf.pdf_