November 13, 2017 / 12:28 PM / a year ago

UPDATE 1-Turkish cenbank to introduce NDF contracts to help manage corporate forex risk

(Recasts, adds Deputy PM Mehmet Simsek’s statement)

ANKARA, Nov 13 (Reuters) - Turkey’s central bank will start offering non-deliverable forward (NDF) contracts to help companies hedge against foreign exchange risk without eating into official reserves, officials said on Monday.

The move comes as the lira currency has lost more than 15 percent of its value against the dollar over the past 12 months, reflecting investor concerns about Turkish politics and the crackdown that followed last year’s coup.

It is part of a broader push by the Turkish government to help reduce the forex risk for corporations, Deputy Prime Minister Mehmet Simsek said on Twitter, adding that other initiatives include a ban on small companies from borrowing in foreign currency and a strict limit on exporters’ borrowings.

“We are planning to launch non-deliverable foreign exchange forward transactions. Forward foreign exchange transactions are one of the most commonly used instruments in exchange-rate risk management,” the state-owned Anadolu news agency quoted Central Bank Deputy Governor Erkan Kilimci as saying.

By introducing the contracts, Turkey is aiming to create a market with deeper volume for local companies, a senior economy official told Reuters. The net forex position of Turkish companies in the real sector stood at -$212 billion as of August, according to central bank data.

Last week, the central bank took another step to support the currency, by withdrawing some 5.3 billion lira ($1.37 billion) of lira liquidity from the market and providing some $1.4 billion of dollar liquidity to banks under a change in reserve requirements.

“A significant contribution will be made to the corporate sector’s exchange-rate risk management and the central bank reserves will not be affected because of the instrument’s nature. These transactions will be conducted by auctions and via the banks that are members of the foreign exchange market,” Kilimci added.

Kilimci also said banks will be able to make transactions with the central bank, decreasing transaction costs.

“Kilimci’s comments imply that the bank will be holding forward auctions for banks and the profit/loss at the settlement date will be exchanged in the local currency. In this respect, the bank’s official reserves will not be affected,” said Gokce Celik, chief economist at QNB Finansbank.

Celik said NDFs were expected to provide limited benefit as they wouldn’t change supply and demand dynamics in the forex market.

“One positive impact could be providing some predictability to corporates and hence alleviate the volatility in spot market by preventing corporates’ rush to buy forex to cover currency risks during periods of unease,” she said. (Reporting by Behiye Selin Taner; Writing by Ece Toksabay; Editing by David Dolan)

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