Turkey’s central bank and the Bank of Korea signed a currency swap agreement in lira and won worth as much as $2 billion.
The deal, effective for three years from Thursday, is designed to promote bilateral trade and financial cooperation for the economic development of both countries, the Bank of Korea said in a statement on its website.
Turkey has sought to obtain currency swaps with central banks around the world to help bolster its foreign exchange reserves, which have fallen into negative territory when accounting for liabilities. The agreements, which have included arrangements worth about $10 billion with Turkey’s regional ally Qatar, have failed to halt a slide in the lira’s value to successive record lows since a 2018 currency crisis.
It is interesting that “another G20 central bank seems willing to support and prolong the continuation of really questionable monetary policy settings in Turkey”, said Tim Ash, a senior emerging markets strategist at BlueBay Asset Management in London. The deal “does not really touch the sides” in terms of defending the lira, he said.
Turkey’s central bank kept interest rates at below inflation for much of last year to help the government engineer a borrowing boom. That led to an exodus of capital from the lira as deposit holders saw returns from their investments, net of inflation, disappear.
The lira rose 0.3 percent to 8.6 per dollar after the swap deal was announced after trading up 0.1 percent earlier in the day.
The agreement with the Bank of Korea was announced hours before the Turkish central bank was due to publish a monthly decision on interest rates. The benchmark rate in Turkey stands at 19 percent, marginally above annual consumer price inflation of 18.95 percent.
President Recep Tayyip Erdoğan is calling for rate cuts and has sacked three central bank governors in just over two years due to disagreements over monetary policy. Erdoğan holds the unorthodox view that higher interest rates are inflationary. The latest governor, appointed in March, has kept rates unchanged even as inflation accelerated from 15.6 percent in February.
South Korean companies make substantial investments in Turkey’s economy, particularly in the construction, energy and technology industries. The investments have included a 2017 contract for the building of the world’s longest suspension bridge over the Dardanelles straits worth around $2.7 billion.