According to Reuters analysis, while the government has announced that it has completed its preparations for the inflation-linked retail bond after the currency-protected deposit, the problem that the new product, if attractive, could lead to dodging from deposits gives the Banking sector cause for concern.
Both officials and bankers are concerned that if the move is successful, there is the potential to attract significant funds from foreign currency or TL deposits, possibly from KKM to the Treasury, damaging the sector’s deposit base.
“MAY TRIGGER ESCAPE FROM DEPOSIT”
If the new product offers individuals an attractive return, the possibility of exiting deposits, including KKM, is a concern, while the lack of an attractive return means that it cannot fulfill its purpose, in particular preventing foreign currency bias .
Despite the costs and other risks that could come to the budget with the accelerated devaluation of TL, the government’s implementation of an issuance that will protect against inflation in the short term has become the main expectation of both the authorities and the market.
A source knowledgeable on the matter, who said “The details of the inflation-linked bond are still being discussed,” indicated that the maturity is expected to be 1 year, adding:
“If one says plus 10 points, there may be an escape from KKM… It must be attractive when determining the interest rate on the bond, but enough not to require one to move away from KKM (attraction is required)… The final decision hasn’t been made yet, but there is a will to make that decision quickly, without waiting any longer.”
“WEAKNESS IN THE TRANSMISSION OF RESOURCE EXCHANGES”
In an environment where inflation hits 70 percent, deposit rates are below 20 percent. While individuals and institutions are expected to have a clear bias towards FX in a severe negative interest rate environment, KKM is currently overtaking individual FX demand.
Due to rising energy costs in the current economic structure, there is a constant need for new foreign exchange. While a significant portion of this demand is met by KKM, rediscount returners, exporters and nearby countries, the creation of new FX resources from these areas, particularly KKM, has slowed in recent days.
“IT attacks the market”
Eco-factoring economist Arda Tunca said: “Banks are waiting for inflation-linked bonds. It is not known if there will be a deposit run or not. Because the details of this product are unknown. This concern is also making the market nervous,” he said.
According to BRSA data, there are 6.2 trillion TL deposits in the banking sector, of which 2.65 trillion TL are in TL and 3.52 trillion TL are in foreign currency. This amount includes KKM, which has reached a size of 820 billion TL.
WHY QUESTION MARKS FOR BANKS?
Since KKM is a bank deposit product, even if banks switch from TL or FX deposits to KKM, it will not adversely affect the deposits of the sector. On the contrary, there are positive aspects such as an extension of the term. However, an inflation-linked bond is not a bank product as it is a Treasury bond, i.e. a bond/bond. Therefore, the potential of the banking sector to attract foreign currency or TL deposits or savings in other investment vehicles in the country for the Treasury is high if the product is successful.
A senior banker said: “The government needs to make foreign exchange available to the public again in the domestic market by giving a high rate of return, even if it is not called interest, with a new structure just like KKM. In the current economic situation, the need for foreign exchange is very high. Individuals still have $139 billion in DTH other than KKM, and despite the low income, they don’t turn to KKM even with political reservations,” he said.
“Now, in the newly planned structure, inflation protection from individuals through the exchange of foreign currencies can arouse serious interest in government bonds, just like KKM. However, the deposits of the sector will be negatively affected as well as the interest generated. As long as it’s a bond, it doesn’t seem possible that this won’t harm the banking sector.”
Treasury and Finance Minister Nureddin Nebati issued a statement to Hürriyet newspaper late last month: “We have completed our work on the design and development of inflation-linked retail bonds, which is one of the alternatives. Upon completion of the other operational processes related to the issuance of this bond, we will determine the timing of the issuance, subject to market conditions and our Treasury Department’s borrowing strategies, and will communicate this to the public.”
HIGH RETURN
The same source said: “Second, it is considering issuing public debt or some method that offers high yields to reduce this demand from companies that hold or buy large currencies.” This method is also known in the market as Superbonds and has been used by the Treasury in the past. In general, an attempt was made to prevent the foreign currency bias by offering high yields with very short-term bonds such as 92 days.
Bankers expect that the method used in Tansu Çiller’s time will this time yield income-indexed returns such as bridges etc. instead of interest. Bankers expect this debt instrument to be implemented in mid-summer, when KKM’s corporate returns are becoming apparent and the likelihood of generating FX demand is highest, or that it will have the greatest impact in mid-summer, even if issued earlier.
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