Rapid unwinding begins in foreign swap transactions

As the effects of foreign-sourced hot money on Turkish financial markets continue, a significant decline has been recorded in foreign TL swap (derivative) positions over the last week. According to data published by the Banking Regulation and Supervision Agency (BDDK) and the Central Bank of the Republic of Turkey (TCMB), the swap stock held by foreign investors in Turkish banks decreased by 2.1 billion dollars to 63.2 billion dollars in the week ending August 28.

The swap stock, which reached a record level the previous week, was recorded at 65.3 billion dollars. However, during the period of sharp fluctuations following the war initiated by the US and Israel in Iran, the swap volume had fallen to as low as 37.6 billion dollars. Following these developments, the economic administration has placed new measures on its agenda to maintain financial stability.

It is assessed that the orientation toward TL assets, which comes with short-term capital inflows, could create instability in the markets in the event of sudden outflows. Authorities are trying to strike a delicate balance between protecting these inflows that support the Turkish Lira and preventing sudden, large-scale capital outflows.

Within this scope, new regulations coming to the agenda include tax applications on earnings obtained from money market funds. Sources close to the matter state that the economic administration is evaluating the implementation of a 10 percent withholding tax on returns obtained from these funds.

According to the preparations being made, both domestic and foreign institutional investors will pay this withholding tax on the income they earn from money market funds. Domestic institutions will be able to offset the withholding tax they pay against the provisional tax they declare every three months. Foreign investors, on the other hand, will pay the deducted 10 percent amount as a final tax.

The currently applied 17.5 percent tax rate is planned to be maintained in the same manner.

These developments show that the volatility in financial markets and the economic administration's efforts to ensure stability are continuing. The rapid unwinding in swap transactions indicates that the risk perception in the markets and sensitivity toward capital movements are increasing.

News Source: 12punto