Is Türkiye ditching gold purchases?
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Türkiye, country of many contrasts where east meets with west, recently announced pausing its gold purchases. It is important move in context of purchases made by central banks as Central Bank of Türkiye recently rose to main, prominent buyer of yellow metal. What to expect of such move?
Is gold demand to be blamed for trade deficit?
Direct reason for this analysis, was press release from 11th of April 2023 regarding latest imports of gold and silver to Türkiye. As a sidenote - we’ll be deliberately using name ‘Türkiye’, but at the same time will to commonly known and used grammatical variants – ‘Turkish’ or ‘Turks’. That is because Ankara applied in June 2022 to United Nations, to change country’s name. New refers to historical name of the state, as used in 1923 independence declaration. Change is also aimed to dissociate country from connotations to a certain bird.
In March 2023 country imported 21.6 t. of gold, which is much less than in previous months. In comparison, Türkiye imported just 65 t. in January and 57 t. in February this year. March imports were worst in terms of tonnage since June 2022. But at the same time Ankara imported much higher volumes of silver. In March 2023 it was 123 t. In comparison, Türkiye kept importing higher volumes during most course of 2022, with yearly average on 69.5 t per month.
This data comes from Borsa Istanbul, which is Istanbul exchange. Hence, we believe in reliability of the source. It is the only exchange operating in Türkiye, providing exposition to stocks, bonds, shares, derivatives, but also diamonds and precious metals. Previously these were tradeable by separate entities, however in 2013 had been fused altogether under new centralised management.
Main reason for massive imports of precious metals held in 2022 was of course increase on inflation. In Q3 and Q4 2022 it oscillated around 80% and above, only dropping since December and reaching 50.5% in March 2023. At the same time Turkish lira continued its depreciation to USD, loosing within 12 months approx. 30%. Meanwhile price of yellow metal in lira rose by more than 1/3. Data about price growth on both assets is based on official prices and statistics. We won’t even dare to assume, what is the real street price – as it is case in economies troubled by high inflation.
But saying that inflation is root of all evil’ lacks details about trends. Like - why such a drop in imported gold and rise in imported silver? In response to large trade deficit and recent catastrophic earthquakes in February, Turkish government announced restrictions on the import of gold. This means among many, that biggest buyer of precious metal among central banks paused at 587.3 t., which is 33.4% of its official reserves.
Reason given by authorities in Ankara relates to widest in decade trade deficit country experienced. Total balance of payments for 2022 stood at deficit of 48.8 bln USD, with only gold imports being accountable for 20.4 bln USD. Approximately 40% of above gold demand can be attributed to banking sector and central bank activities, with remaining share being used by non-banking sectors (jewellers, retail, industrial etc.). That strongly reflects loss of confidence in local currency, its continuous loss of purchasing power and capital controls preventing accessibility to other assets.
Above could be also comparable to international trade deficit that country experienced. It had grown from 46.2 bln USD for 2021 to 109.5 bln USD in 2022. Türkiye’s exports totalled at 254 bln USD and imports at nearly 364 bln USD. Gap had grown further. With recent tragic earthquakes, country’s export dropped by 1.5 bln in February to 18.64 bln USD with imports reaching 30.83 bln USD.
Import of yellow metal, next to energy imports is one of the main reasons for widening trading misbalances. There are lot of ‘ifs’ by this occasion coming from government and central banks’ representatives – ‘if not energy and gold import, trade deficit would be on surplus or near surplus’ – they say. That is somehow true, but in economy there are no ‘ifs’ only facts. And fact is, that Ankara works toward opening new gold mines and raising its oil production output. But is far away from achieving something even close to what we could at this time call self-sufficiency, and so will need inflows of these commodities.
How gold contributes to misbalance? At first, let’s check price of gold in lira (TRY) for 2021-2023. We’ll discover price appreciation by 173% in this period.
Knowing that, let’s refer again to tables from Borsa Exchange provided earlier. Comparison of January 2022 and 2023 m/m figures on gold imports will give us 19x growth on imported volume. For February m/m this would stand on slightly over 12x. Worth noting that in comparison 2021 was pretty calm in terms of volumes – which reflects temporary stabilisation of lira.
And at the end, let’s confirm value for gold imports and exports monthly. We can do that in comparison to energy imports and exports – local Treasury confirms these two sectors attributed most to deficits.
Let’s wrap it up to show some trends. Türkiye was always important place on map of gold flows. It had however grown on importance due to persistent and annoying inflation. Its growth had triggered higher gold volumes purchases. That was in the times of high double-digit inflation, so with depreciation on lira and really elevated level of purchases, it started to lay heavier burdens on balance of payments, attributing heavily to trade deficit. After tragic earthquakes of February 2023, government decided it can’t afford to maintain import levels and made decision about pausing gold purchases. Just next month it attributed to higher purchases of silver – 123 t. in March vs 82 t. in Feb, and 123 t. vs 68 t. m/m.
So why Türkiye need so much gold? Of course, country is one of great buyers and gold is being perceived there a traditional gift, it also protects against instability and inflation… But apart of these, we must discuss capital controls imposed in attempt to ‘lira-lise’, even if Ankara didn’t speak out loud of such ‘micromanagement’ or denies comments.
Lira-lisation, de-dollarization
and ‘unconventional’ capital controls
Traditional economic theories assume (in short), that would currency’s purchasing power is crumbling as a result of inflation, it is necessary to raise interest rates, which in effect makes credit lines more expensive and cools economy down. Less liquidity should then effect with less purchases being made, and we should see gradual lowering of inflation. However, president Recep Erdogan disagrees with this approach, favouring instead strong lira-lisation and de-dollarization. Government tries to determine valuation of its currency by enforcing its usage and circulation, thus keeping cost of borrowing low, instead of raising interest rates which could help to battle inflation. This can be considered as de-dollarization by administrative means, as government recognises high dependency on USD in its international trade, and therefore exposure to fx issues, as mother of all issues. In addition, Ankara used to be subject of US sanctions (and being engaged in trade war with USA) for trying to maintain its ambitious and often independent international policy. That includes among many:
- Interventions in Syria and Libya,
- Diplomatic conflict with Greece over Aegean isles,
- Having in-between stance towards conflict of Russia and Ukraine,
- Being conflicted with USA over attempted purchase of Russian AA systems,
- Being engaged in Cyprus conflict,
- Arguing with its neighbours over gas and oil resources in Mediterranean Sea,
- Being engaged in Kurdish conflict,
- Being active weapon supplier in Armenian-Azer conflict,
- Trying to cut its own piece of cake in Rijad vs Teheran conflict over primate in Islamic world.
Turkish interest rates less CPI equals real negative interest rate of over 40%, which makes very attractive to borrow money in local currency. That keeps economy running on cheap credit, but at the same time keeps inflation elevated as there is over-liquidity on markets. To prevent bank runs or mass ditching lira for more stable assets Ankara decided to undertake some ‘unconventional’ capital controls. ‘Unconventional’ in this context means enforcing lira and attempting to acquire foreign currencies and gold. These are used on international markets to acquire more lira in attempt to enforce its fx stability. As ‘lira-lisation’ and ‘de-dollarization’ are prime targets, any central bank’s governor or finance minister who shows more hawkish approach towards interest rates is being sacked. Currently interest rates for March 2023 are at 8.5% from 19% in 2021, official CPI inflation stands on 50%, official PPI at 62.5%. CPI and PPI were even higher, however recent drops have to be attributed to base effect. All of the above are official government data, hence may be subject of being ‘softened’, as being head of Statistics Institute in Türkiye also appears to be job with high risk of turnover.
Chart below presents long-term strengthening of USD to TRY, with each candle representing single month. Loosing purchasing power by lira seems to be clear, for most of 2022 this can be additionally attributed to temporary strengthening of dollar (from 95 at beginning of 2022 to 114 tops during its course) as a result of fast pace of raising interest rates.
With double-digit inflation, to avoid exchanging lira by general population to other foreign currencies (mostly dollar), in 2022 government promised and delivered topping up savings in local currency, to keep its pace with dollar. Let’s assume esteemed reader would keep equivalent of 100 USD in lira and earn interests on annual basis. But lira lost i.e. 50% to USD. Now, government steps in and reimburse the difference, so you’d still have equivalent of 100 USD. Interest rates for savings are being added up by bank, rest is reimbursed by country. Nominally we still have our equivalent in USD, practically we can buy less for it than year ago.
Initially it looked like policy was working – in December 2021 lira strengthen from near 20 to 10 and ended up month on 13 liras for USD. On the chart above, that would be this red Doji star with massive shadows. But truth is, it was local central bank spending foreign reserves to buy lira on forex markets, hence strengthening. Scheme attracted by end of H1 2022, 992 bln liras (59.9 bln USD) and resulted in yields of nearly 49%, costing treasury 21 bln liras (1.3 bln USD) in what is essentially interest payments.
But foreign reserves are not indefinite, so process of losing on value eventually speeded up even more. That essentially left Ankara with two options – print money or tax. One leads to growth on inflation, other to mass discontent and destabilisation. And it is last thing that country engaged on many external fronts and internally in Kurdish matter, that experienced failed attempted military coup d’état in 2016, needs. In the moment of very sensitive stabilisation, war has erupted across the Black Sea, which didn’t help to restore trust in lira as Türkiye is basically neighbouring to warzone in the eyes of investors.
In need for assets that could be exchanged internationally for lira, In February 2022 Ankara announced its intention to buy gold Turkish citizens had stored for liras. Idea was to use it in attempts to stabilise its currency (sell gold for USD on LBMA, buy TRY for USD on FX markets). Ankara hoped to access some gold kept in private hands, worthy 250-350 bln USD, assessed to be total of 5k t. in bars, coins and jewellery. Financial Times said in Feb 2022, that buyback scheme attracted approx. 23 bln worth of gold to be sold to government in need for liquidity. Additionally, local central bank decided to incentivise fund holders would they decide to convert their gold deposits and other foreign assets into Turkish lira. After all, Ankara may lack fx and crave for more gold, but has lira in great abundance.
Other policies aimed to acquire foreign reserves were implemented in course of 2022 and 2023. In January 2022 Ankara mandated exporters to sell 25% of their foreign-currency revenues to the Central Bank. Just couple months later they announced restrictions on commercial loans effectively limiting foreign currency assets companies have. Upon having foreign exchange worth more than 15 mln lira (and later in the course of the year 10 mln lira), and if that exceeds 10% of total assets or annual revenues, entity won’t receive loan if apply for one, unless sell some foreign currency to match within assumed threshold. Sector’s foreign currency holdings are estimated at 80 bln USD. Turkish central bank also tightened its grip over foreign exchange market, making every trade over 5 mln USD to be subject of investigation and approval. At the same time, Ankara’s representatives were presenting themselves in London inviting inflow of foreign capital and investments. They also managed to conduct some large currency swaps with countries.
Did such ‘unconventional’ politics help? FX and gold reserves of the Central Bank totalled 114.2 bln USD ant the end of 2022, in reality they were far less, as when having liabilities omitted, net reserves were just 13.4 bln USD. Figures for February show further decrease with net below 10 bln USD. Türkiye need liquidity in other than lira form. And here comes gold, again.
Need for liquidity? Need for gold
In past years, Türkiye was repatriating its gold reserves from abroad. In 2017 and 2018 after a US case against Türkiye’s state lender Halkbank on failing to comply with sanctions against Iran, Türkiye repatriated all its gold holdings from the USA and Bank of International Settlements, leaving only 6 tonnes in Bank of England. Yet since 2020 at least 78 t. had been transferred back to UK as a result of economic turmoil affecting lira. London is one of the most liquid gold markets globally, so Türkiye seeks there for liquidity, lending precious metal in form of collaterals and swaps for foreign currencies. It is possible that volumes are being held there also to enable emergency sale.
According to the recent central bank annual report, Turkish gold is kept at the Bank of England, at Borsa Istanbul and Turkish central bank as follows:
At the moment of writing these words, there is no publication regards to 2022, so we’re unable to assess how proportions had changed. Of course, over course of 2022 volume did. According to datasets provided by World Gold Council (WGC), we discuss here about 587.3 t. This may be however subject of question mark, as since 2011 central bank and Treasury launches several schemes that keep certain volumes in nearly constant movement. One of these is Reserve Option Mechanism (ROM).
In October 2011 Türkiye introduced a new policy tool – ROM - which enabled domestic commercial banks to deposit gold at the central bank as part of their reserve requirements. That was introduced due to instability of lira. Scheme, incentivised local banks to attempt acquire gold. By replacing required reserves with yellow metal, volumes of lira had been released for circulation. General population considered its gold as safe haven hence was reluctant to make mass sales, so banks had to acquire or borrow most of it on foreign markets – predominantly on LBMA. What is proportion of gold purchased or lend remain unknown. But consequence was that gross gold reserves held at the central bank fluctuated according to the amount of gold injected.
However, tonnage provided by WGC and reported remains subject of further discussions. Gold analyst Jan Nieuwenhuijs assessed in 2022 Turkish net gold reserves held at the end of 2021 for 354 tonnes, which would be approx. That is 300 tonnes less than reported in above table from central bank’s annual report. This can be subject of further decline in tonnage, as 78 t. stored within LBMA’s vaults may be subject of currency swaps. If Ankara won’t be able to unwind these by re-purchase, that means collateral is lost. This of course remain unconfirmed and may be treated as speculation, however in August 2021, in LBMA’s paper dedicated to matter of Turkish gold we read that:
“After Turkish foreign exchange reserves dropped to a multi-decade low over the summer, some gold holdings are believed to have been mobilised to support the lira and/or repay international debt.”
Seems that gold under Ankara’s management is being constantly used as a factor stabilising lira’s currency exchange. In the context of diminishing foreign reserves held by central bank, need for gold creates strong fiscal pressures. Hence decision to wrap imports of gold, especially in the context of recent tragic earthquakes seems to be justified. However, due to constantly persistent inflation Turks continue to remain very cautious towards its currency, even despite strong interventionism. That is why private gold holdings remain high. Limitations on yellow metal’s import turns onto supporting factor to silver, as more financially accessible alternative. As presented in first chapter of analysis, country imported in March 123 t. against 82.6 imported in February 2022. That is slightly over 40 t. of silver extra or 1/3 more.
Summary
Raging inflation is of course one of the main subjects discussed in the context of incoming presidential election in Türkiye set on 14th of May 2023. Current polls show that president Erdogan may lose its seat to Kemal Kilicdaroglu, who may be considered as candidate representing united opposition. Apparently, Erdogan lost a lot in effect of what is considered as hesitant and not fast enough help to provinces affected by recent earthquakes.
However, inflation is just one of the points of political pre-election conflict, although very vocal. Under Erdogan, country leaned more toward BRICS stance, where usage of own currencies along with de-dollarisation seem to be their main point. Erdogan slowly but surely brought Islam back into the heart of Turkish public life, eroding the power of secularity created by Atatürk. On the basis of historical connotations reaching to the traditions of Ottoman Empire and current actions, nationalism had been awakened. And country itself leaned more onto soft authoritarian democracy. Some of these cannot be or will be hard to reverse as had been accepted by general population. That made country a republic of contrasts. Of course, it always was a place where east meets with west, however these seem to be now magnified.
In terms to inflation, Kilicdaroglu promised return to ‘orthodox monetary policy’ and central bank independence’. Details are mostly unknown, but would opposition’s candidate become president of the republic, soon we may experience raise on interest rates and monetary tightening.
“Providing economic confidence and returning to governing fundamentals is what Turkey needs (…) But it wouldn’t necessarily be popular or easy.”
Would it mean total reversal on all monetary and fiscal policies it is unknown, he shares certain views with his opponent.
