Turkey unveils new income-indexed bonds, sets caps on consumer loans

Turkey announced several new economic measures on Thursday and Friday which the authorities said were aimed at containing inflation, encouraging savings and strengthening the Turkish lira.

The Ministry of Treasury and Finance announced that it would issue national bonds indexed to the income of state enterprises to encourage households to save in lira assets, while the banking watchdog announced limits of maturity for consumer loans.

The announcements came after the ministry said in a statement that a series of new “solution-oriented measures” would be announced on Thursday evening, aimed at curbing inflation and supporting the lira.

The Treasury and Finance Ministry said it would start assessing demand for the so-called income-linked bonds on June 15. New domestic debt instruments would have a guaranteed minimum return in coupon payments, he said. The bonds are indexed to the income of certain state economic enterprises.

The Treasury statement earlier on Thursday had underlined Turkey’s status as a free market economy.

“Unfortunately, some circles are seizing every opportunity to recklessly question Turkey’s status as a free market economy with a liberal exchange rate regime,” he said.

The statement came after credit rating firm S&P Global said on Wednesday there was a growing risk that Turkey could introduce additional capital controls if pressure on its currency and financial markets continues to escalate. .

In a separate statement on Friday, the Treasury and Finance Ministry pledged that the fight against inflation remained the top priority of its macroeconomic policy and that prudent fiscal policy would continue in the period ahead, fiscal discipline should never be compromised.

“Practices that will increase the use and attractiveness of the Turkish lira will be continued without compromising free market rules,” the ministry said.

After this initial statement, the lira strengthened to 16.8 against the US dollar, before falling back to 17.2 by the end of the session. The currency weakened to 17.24 against the dollar in early trading on Friday.

The lira is down 23% this year on top of the 44% fall in its value last year after a series of central bank rate cuts.

Among other coordinated measures, the Banking Regulation and Supervision Agency (BDDK) said it decided to set a maximum maturity of 24 months for consumer loans between 50,000 and 100,000 TL and a maximum maturity of 12 months for consumer loans above TL 100,000.

He also increased minimum payment requirements on credit cards in an effort to slow loan growth.

It said in a statement that, among other measures, it will direct loans to productive areas such as investment and exports.

Separately, the Capital Markets Board (SPK) said it had lowered its fees in order to encourage foreign financing for public offerings held in Turkey and to encourage companies to obtain funds by issuing instruments of the foreign capital market.

Finally, the Central Bank of the Republic of Turkey (CBRT) said on Friday that banks would retain long-term fixed-rate securities in additional liras for currency deposits / holding funds as a complementary step to the increase. the weight of lira fixed-rate securities in the collateral pool which will come into effect on June 24.

“The objective of this regulation is to increase the effectiveness of monetary policy within the framework of the reading strategy,” he said.

It also said it was increasing the reserve requirement ratio for lira-denominated commercial cash loans to 20% from 10% previously to support financial stability.

Thoughtful supplementary budget

Meanwhile, the Turkish government is reportedly considering pushing a supplementary budget through parliament ahead of a recess next month to cover possible summer payments and the rising costs of a falling lira and runaway inflation.

Two sources told Reuters on Thursday that work on the supplementary budget was underway, but no final decision has been made on whether it will be needed.

Fueled by soaring food and energy prices, Turkey’s annual inflation rate rose at a lower pace than expected last month, but still peaked at 73.5% in 24 years.

The fiscal burden increased due to rising energy costs, increases in public sector wages and pensions, the decline in the pound and the related increase in the cost of a deposit protection scheme (KKM) launched in late 2021 to boost lira deposits by protecting against depreciation.

“Electricity and gas costs in particular have had an impact (so) it seems impossible to stay on budget this year,” a senior official said on condition of anonymity. “Additional budgeting seems inevitable.”

A Treasury source said a supplementary budget was not currently on the agenda.

To ease the load on household budgets, Ankara has introduced fuel, electricity and gas subsidies worth TL 200 billion in 2021. They were supposed to cost TL 300 billion this year, but the costs energy increased much more than expected.

The official said a few meetings have been held but the size of an additional budget is unclear and state institutions are in the process of determining their combined additional budget needs.

“The best option would be to get it through before the holidays,” he added.

Parliament usually rises from the beginning of July to the beginning of October.

“Work has begun to publish an additional budget during this legislature (…) (and) a final decision has not been taken,” said another source familiar with the matter.

Data suggests that the budget deficit was moderate at 2.5% of gross domestic product (GDP) at the end of April, but the growing cost burden indicates that it will widen by the end of the year towards 5%, this which would bring Turkey closer to the level of other developing countries. markets.

The government also considered a supplementary budget at the end of 2021, but shelved the plan and faced rising costs with higher-than-expected revenues.

The government, since late December, has raised wages and cut taxes to support low-income households, taking advantage of strong public finances and the lowest deficit among its peers until 2016.

The budget deficit-to-GDP ratio remained low at around 1% from 2013 to 2016, boosting Turkish investment. It then increased to 1.5% in 2017 and reached 3.5% in 2020.

KKM’s deposit protection scheme was worth TL 904 billion last week. While the central bank is supporting part of the program, the Treasury said its payments to depositors amounted to TL 21.1 billion as of June 3.

The program aimed to encourage residents to convert their foreign currency savings into lira under a deposit protection scheme, compensating depositors for any loss due to the depreciation of the lira.

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