Turkish Central Bank to introduce new mechanism to tackle currency risk


The Central Bank of the Republic of Turkey (CRBT) is planning to introduce a new instrument to help manage the corporate sector's exchange rate risk, CBRT Deputy Governor Erkan Kilimci has said.

He confirmed that the central bank will introduce a new product in the upcoming days to manage the risk posed to the real sector.

"We are planning to start the Turkish lira-conventional forward foreign exchange transactions that will protect the exchange rate risk." Emphasizing that foreign currency-denominated borrowing dynamics, an exchange rate-hedging mechanism and a better understanding of the risks were important in terms of price stability and financial stability, Kilimci said the CBRT was working in coordination with the Financial Stability Committee on this purpose.

The deputy governor added that the CRBT has developed a "Systemic Risk Data Tracking Model" for the establishment of a healthy monitoring and analysis mechanism to manage the exchange rate risk of the real sector. It has also compiled a comprehensive data set to monitor the company-based foreign exchange position, cash flow and the use of derivative products in the first stage of the process.

"We aim to increase the efficiency of the information and data collection process of real sector companies through the current draft law, which will contribute to the formation of a more effective legislative framework in managing the exchange rate risk," Kilimci said.

Underlining that effective risk management is important for financial stability and price stability, he went on to say, "It is important that firms are not adversely affected by possible market fluctuations in terms of financial stability." He added that the real sector firms that manage their risks effectively and adequately are more resistant to short-term market fluctuations and can effectively monitor their activity decisions by focusing on medium and long-term fluctuations.

He, however, acknowledged that sharp fluctuations in exchange rates could disrupt inflation expectations and pricing behaviors.

The CBRT deputy governor also noted that this was an important risk factor that affects price stability and reduces the effectiveness of monetary policy, adding, "Thus, the real sector's effective management of the exchange rate risk will contribute to the protection of the market equilibrium and to limiting the adverse effects on pricing behavior."

Kilimci further said that studies carried out by the CBRT in this framework point to some areas of development in terms of regulatory purposes under the legislation, stressing that it is important to encourage companies to implement effective risk management and to contribute to the development of appropriate financial products and markets.

According to him, the central bank aims to contribute by putting a new product into practice over the coming days and plans to start the Turkish lira-conventional forward foreign exchange transactions, which will protect the exchange rate risk.

Forward foreign exchange contracts are among the most widely used products in exchange rate risk management. Accordingly, the difference between the forward exchange rates set on the contract day and the spot rate on the settlement day will be paid in Turkish liras. This way, while contributing to the real sector's exchange rate risk management, CBRT reserves will not be affected by the nature of product. These transactions will be carried out through the tender of members of the foreign exchange market via the banks.

Kilimci stressed that the CBRT aims to provide depth in forward-exchange markets, noting that the market will have a more developed framework of risk management for corporate firms in the future.

Underlining that the ability of banks to carry out transactions with the CBRT will reduce transaction costs, Kilimci concluded, "We will support access to a simple, effective and deep financial product in terms of management of risks in the real sector."

Last Monday, $1 dollar traded at over TL 3.86, up from TL 3.57 as of Sept. 29 and marking a 5.6 percent monthly hike in the dollar-lira exchange rate. The average U.S. dollar- Turkish lira exchange rate was 3.66 in October and 3.47 in September, while the 10-month average was 3.61.

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