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Turkey’s lira-protection scheme set to survive confidence test

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Turkish government's protection scheme compensates depositors for lira losses against foreign currencies
  • July and August seen as crunch time for deposit rollovers
  • One third of $30bn rollover for 2 months already complete
  • Lira back near record low, piling on costs of deposit scheme

Turkey’s attempt to curb demand for foreign currency by protecting lira deposits looks set to survive its biggest test yet with deposits worth tens of billions of dollars being renewed, sources say, but the cost is rising as the lira slumps.

President Tayyip Erdogan’s government introduced the scheme, which compensates depositors for lira losses against foreign currencies, last December to stem a currency collapse triggered by interest rate cuts that Erdogan had pressed for.

July and August is a time when many depositors choose whether to roll over their deposits. Any exodus from the scheme – known as KKM – would pile more pressure on the lira which has already fallen close to December’s record low, stoking inflation that is running at a 24-year high near 80 percent.

One banker said a third of the total $30 billion rollovers due over the two months had already been completed without problems.

“If the rollovers, which we estimate at $20 billion for August, are like in July, one of the most risky KKM periods will be overcome without a huge demand for foreign currency,” the banker said.

Another source said rollovers of KKM accounts in July amounted to more than $5 billion, with interest from individual accounts at a record level and more interest expected on the corporate side in the coming period.

Healthy corporate KKM rollovers are expected to be driven by tax breaks offered to depositors, the sources told Reuters.

“We do not expect any problems with the KKM rollovers in August,” the second source added.


However the cost of the scheme to the state is continuing to rise as the currency slides, raising the stakes for Erdogan who must call an election by next June. The economy is a key electoral battleground and a survey by MetroPoll pollsters last month said 75 percent of respondents think it is poorly managed.

Pressured in part by the war in Ukraine, the lira has weakened 27 percent this year and is close to 18 to the US dollar, near the all-time low of 18.4 it reached in December before the KKM was introduced.

“The KKM move was a temporary solution for the economy, but now it has started to become risky,” a government official said, adding that inflows of foreign exchange from abroad had not come at the speed desired by the authorities.

“We are coming to a crossroads. If KKM is terminated, there is a very serious amount of lira there and most of it will tend to buy foreign currency,” the official said.

Though no official data is published, economists calculated in June that KKM conversions had made one of the biggest contributions to central bank reserves at around $28-30 billion this year. Still, the bank’s net reserves have dwindled to a 20-year low due partly to months of dollar sales meant to support the lira.

By the end of June, the KKM scheme cost the budget 37.2 billion lira. Authorities have not said how much it has cost the central bank, which backs part of the scheme.


Income tax exemptions rolled out for KKM users earlier this year should sustain demand for now, even as they further strain the budget.

“People are mostly going to stick with the KKM because the tax advantages were extended. Authorities have that carrot, whatever the costs to the budget and central bank,” said another banker.

Corporates had been under heavy pressure on the forex side and they effectively cannot buy other currencies unless they need to pay suppliers abroad, the banker added.

Goldman Sachs analyst Clemens Grafe said he expected dollarisation by corporates to slow down due to the extension of the corporate tax exemption on income earned from KKMs.

“We also expect additional measures to prevent further outflows from the FX-protected deposits as the scheme’s attractiveness wanes with further Lira depreciation and rising inflation,” he said.