One of the objectives of the CBRT's tightening process is to boost demand for the Turkish lira. The aim is to strengthen the monetary policy transmission mechanism by increasing the share of Turkish lira deposits in total deposits. Accordingly, with the regulation dated August 20th, the CBRT introduced a target for banks to convert maturing FX-protected deposit (KKM) accounts and FX-protected accounts converted from FX (DDM) into TRY deposits.
DDM account holders can generate FX demand in the spot market with the TRY liquidity obtained at account maturity. Therefore, one of the criteria for the success of this regulation is the change in FX demand at maturity. This blog post provides an analysis of the FX purchases and sales of corporations with DDM accounts at maturity and the impact of the macroprudential regulations announced on 20th of August 2023 on these transactions. To this end, we analyze the FX transactions on the spot market during the week of account maturity by firms whose conversion accounts matured after 1st of May 2023. For 28,472 firms whose DDM accounts matured in any week between 1st of May and 21st of November 2023, the deposit amounts and FX transactions were aggregated at the firm level to create a weekly data set.
Approximately 30% of the firms analyzed were net FX buyers[1] at the maturity of the conversion account, but this ratio fell noticeably after the regulation of 20th of August 2023 (Chart 1). The positive effect of the regulation on FX demand continued in the post-September period, reflecting fewer firms as net FX buyers at maturity. Around 8% of the firms in the same sample were net FX buyers in weeks without a maturing DDM account.
Impact Analysis
The behavior illustrated in Chart 1 is also tested with regression analysis using firm-level micro data. The regression analyses presented in Chart 2 measure the likelihood of firms becoming net FX buyers in the weeks when their DDM accounts matured and the effectiveness of the regulation announced on 20th of August 2023 and implemented from the week commencing on 28 August. Given that firms have differing FX needs, firm fixed effects are used to control for firm heterogeneity, and week fixed effects are used to control for time effects. In other words, the analysis measures the effect of the maturity date on the same firm's FX purchases before and after the regulation. According to the results given in Chart 2:
- Firms whose DDM accounts mature are 23.4% more likely to become net FX buyers on average than other firms in the sample. This ratio fell to 15.4% after 28 August.
- Firms whose DDM accounts mature are 27.8% more likely to become FX buyers on average than other firms in the sample. This ratio fell to 16.3% after 28 August.
In sum, the targets defined in the new regulation in the scope of the new policy framework and the increase in interest rates both aim to increase the share of Turkish lira deposits. The results of the steps taken are being closely monitored. According to the impact analysis, presented here in summary form, the conversion process from DDM deposits to Turkish lira accounts has not created an additional demand for FX. Moreover, after the regulations, the likelihood of firms with maturing accounts becoming net FX buyers has significantly decreased. The findings of the analysis show that the regulation was successful in this dimension and the steps taken supported conversion to Turkish lira deposit accounts without creating additional FX demand.
[1] Firms that have a positive FX buying and selling difference in a given week are classified as net FX buyers. Firms that purchased any amount of FX in a given week are classified as FX buyers. Derivative market transactions are excluded from the analysis.