Mysterious Currency Inflows Aid Turkey's Central Bank: Week Ahead

By Steve Bryant

Aug. 10 (Bloomberg) -- Turkey’s central bank will adjust its current-account records this week as it struggles to explain the origin of $18 billion in foreign currency inflows that have reduced the need for International Monetary Fund loans.

The inflows since October, which economists say came from companies paying down debts using bank accounts abroad, have helped drive the lira to a nine-month high and trimmed the current account deficit, reducing the need for a new IMF loan.

“It appears that corporates are repatriating cash holdings from abroad to pay debt,” said Inan Demir, an economist for Finansbank AS in Istanbul. “The problem is that the central bank doesn’t seem to have detailed knowledge about the liquid assets Turks have abroad.”

The foreign debt of Turkish companies has declined $8 billion since October, according to the central bank, while domestic debt has also probably declined. As the source of funds for those repayments is not always clear, much has ended up in the net errors and omissions section of the current account.

The central bank will go some way to resolving the mystery today when it transfers $4.4 billion of the inflows in the last quarter of 2008 from the errors and omissions section to the capital account, attributing them to cash transfers from foreign bank accounts held by Turks, according to a July 29 statement.

That leaves $13.6 billion still unaccounted for, equivalent to about 2 percent of last year’s gross domestic product.

The unexplained money has sparked newspaper reports of trucks laden with gold and banknotes rumbling across the Iranian border into Turkey, which the central bank on June 30 dismissed as false.

Lira Strength

The strengthening lira prompted the bank last week to resume auctions to buy $30 million of foreign currency a day. The bank had reserves of $65.8 billion on July 24.

Because of the unexplained inflows, “there’s been no pressure on the lira and no problem with debt dynamics, so the government doesn’t feel any urgency to agree to an IMF deal,” said Yarkin Cebeci, an economist for JPMorgan Chase & Co. in Istanbul.

Turkey has been discussing new loans from the IMF since May last year and negotiations have stalled over fund demands for a plan to reduce the budget deficit and improve tax collection.

The current-account deficit for June is expected to narrow for a tenth consecutive month, contracting to $2 billion from $5.5 billion a year earlier, according to the median estimate in a Bloomberg survey of 14 economists. Declining demand for imports, cheaper oil and the cash inflows, are all helping reduce the shortfall.

The benchmark stock index gained 5 percent last week to 44,767.58. The lira weakened to 1.4741 to the dollar at 5:18 p.m. in Istanbul on Aug. 7 from 1.4707 a week earlier. The yield on the benchmark lira bond tracked by ABN Amro fell to 10.15 percent from 10.69 percent.

The following is a list of events in Turkey next week:

Event                          Survey     Prior        Date
Industrial output data         -12.5      -17.4        Aug. 10
Capacity utilization data      74%        72.7%        Aug. 10
Current-account figures        -2.0B      -1.5B        Aug. 10

To contact the reporter on this story: Steve Bryant in Ankara at sbryant5@bloomberg.net.