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Reports of Turkish gold repatriation as lira suffers depreciation

Ankara

Geopolitics, debt and ongoing inflation have been cited as reasons for a rumoured gold repatriation programme by Ankara

Turkey has reportedly carried out a gold repatriation as the country’s currency continues to suffer high inflation. The Turkish economy has been under pressure recently from high-levels of corporate debt held in dollars and euros against which the Turkish lira has significantly depreciated. Last month, Reuters reported inflation was at 10.26%, down from a high of 12.98% last year but still well above the Turkish Central Bank (TCMB) target of 5%. Turkey has been one of the fastest growing economies in the G20, reporting 11.1% year-on-year growth in the third quarter of 2017.

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The amount of leverage in the system is of concern. “Corporate debt is now roughly 70% of gross domestic product according to our estimate,” Ugras Ulku of the Washington-based Institute of International Finance told The Financial Times. “More than half of that is in foreign currency. So whenever the lira gets weaker, even though we haven’t so far seen widespread defaults, the depreciation eats up profits or distorts balance sheets.”

The value of the lira has halved against the dollar since 2014, a dollar now worth four lira

The value of the lira has almost halved against the dollar since 2014

President Recep Tayyip Erdoğan has allegedly called for international loans to be made in gold to avoid currency pressure. Gold is reported to make up over $20 billion’s worth of the nation’s total reserves while foreign currency makes up approximately $90 billion. Over the last 10 years Turkey has significantly increased its gold holdings.

Turkey’s total gold reserves

Turkey’s total gold reserves. Source: The World Gold Council

Although unconfirmed by the TCMB, it has been widely reported that Turkey has become the latest sovereign state to repatriate its gold reserves following similar moves by Germany and Hungary, allegedly returning 220 tons (worth around £6.7 billion) from America’s Federal Reserve. Such movements are typically done in secret and piecemeal with bars carried as cargo on airliners. According to the World Gold Council, Turkey currently has gold reserves of 564.8 tons, making up 21.8% of the country’s total reserves.

Gold has gained in value against the lira

Gold has gained in value against the lira

With an election called for June by an increasingly autocratic regime opposed to free speech or a free press, some economists are predicting currency volatility to be ongoing. Bulent Gultekin, a professor of finance at the University of Pennsylvania who served as central bank governor in the 1990s, told The Financial Times the Turkish economy is suffering from inherent faults.

“Every government pushes for higher growth but the savings rate is not high enough to sustain it. So the economy relies on foreign capital. The reality is that the Turkish economy goes from one crisis to another — typically an exchange-rate crisis. We had them in 1960, in the late 1970s, in 1994 and in 2001. The issue is whether this is going to be an orderly adjustment or a rapid one.”

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