(Bloomberg) -- The Turkish lira weakened the most in the world as the central bank struggles to explain recent moves in its foreign-currency reserves, fueling concern about the state of the nation’s finances amid the looming prospect of more political upheaval.
The lira sank as much as 1.9 percent after the Financial Times reported the central bank used short-term swaps with local lenders over the past month to bolster its net international reserves, which stood at $28.4 billion as of April 12. Data complied by Bloomberg show the outstanding amount on these transactions was $12.7 billion as of the end of last week.
President Recep Tayyip Erdogan said the report showed that Turkey is under attack by Western media portraying Turkey’s economy as “collapsed, finished.” Regardless of the reports, “our situation is clear,” Erdogan said in a televised speech from Ankara.
A senior central bank official, speaking on condition of anonymity, suggested it was unreasonable to expect that reserves will move in tandem with currency swaps. The amounts the regulator borrows from banks through swaps shows up in its balance sheet, but the changes in reserves are the outcome of wider transactions and operations, the official said.
The confusion is casting a shadow over the outlook of Turkish assets amid political turmoil triggered by a dispute over the result of a local election in Istanbul, where Erdogan’s party is contesting its defeat. A sudden drop in reserves in March gave way to the lira’s biggest single-day drop since last year’s currency crash.
Fraud Ruling
Turkey’s High Election Board is expected to rule early next week on the governing AKP’s claim of fraud, state television reported. Ekrem Imamoglu of the CHP assumed the office of Istanbul mayor after being awarded a disputed victory, sending the lira higher on Wednesday.
In his first speech after taking up his mandate, Imamoglu called for a swift resolution to end the uncertainty. “There are processes going on as of now, we’re aware of this,” he said. “Naturally we await certain statements on these processes for the peace and happiness of our city and its residents.”
Losing Istanbul to the opposition would add to Erdogan’s troubles after the March 31 elections brought to an end AKP’s control over Turkey’s major cities. Inflation and unemployment have been taking their toll on the country after a plunge in the value of the currency pushed the economy into its first recession in a decade.
Away from home, Erdogan has been struggling to contain the fallout from a diplomatic spat with the U.S. over Turkey’s planned purchase of a Russian air-defense system and dispatched top aides to Washington this week.
Reserves Question
The central bank has refrained from providing an official explanation of how the borrowed money is being accounted for in its weekly reserves figures, but officials have privately acknowledged the need for clarity as analysts try to square the swap volumes with recent volatility in Turkey’s foreign holdings.
Turkey has around $118 billion of foreign-currency debt coming due within the next 12 months and relies on the central bank’s buffers to meet its obligations if the flow of capital that finances the economy begins to slow.
Foreign investors have already withdrawn a net $1.6 billion from the nation’s lira bond market this year amid political and economic turbulence that has rocked the country’s markets.
While there’s nothing at fault with the central bank’s accounting, its off-balance sheet liabilities need to be taken taken into account in assessing changes in reserves, said a central bank official who spoke on condition of anonymity. To avoid any unnecessary speculation, the central bank needs to clarify its net reserve position, he said.
Last month, JPMorgan Chase & Co (NYSE:JPM). recommend investors sell the lira, citing the drawdown of the buffers in March. Earlier this month, Moody’s Investor Service said the drop was credit negative, as the country’s “very low” levels of reserves cover less than half of its shot-term external payments.
The drop doesn’t reflect any extraordinary developments, a central bank official said last month, asking not be identified.