Turkey has one of the highest current account deficits in the world and is desperately trying to draw Turkish gold into the financial system.
Today, it is estimated that Turkish households hold around 3,500-5,000 tonnes of gold worth about $130-190bn. That is equivalent to one fifth of the country’s GDP. But because the savings are out of the financial system, they do not work in any way. For an economy that is characterised by a relatively low rate of saving and covering its foreign loan needs, this is a very attractive target.
Commercial banks have accepted gold deposits since around 2008. Customers could set up a special account through which they could buy and sell.
However, they were not particularly popular, and most of their deposits were in cash rather than in gold. Banks did not have much motivation to set up such accounts because potential “borrowers” were simply investors who need gold for its short sale or mines that were behind on delivery.
A breakthrough occurred at the end of 2011 when the central bank of Turkey allowed commercial banks to hold some of the obligatory reserves in gold. Initially, it was 10%. The ratio, however, later increased to 30%.
The banks noticed that it was more profitable for them to hold gold in the central bank’s vault than lire, so they immediately took full advantage of the new diversification opportunity.
The banks began to pay for the possession of noble metal, so they offered investment products to allow them to deposit bullion. Consequently, it is possible to bring in bars, coins or jewellery to selected banks, where they are examined for purity and placed on a personal deposit after being melted into a standard mould.
Taking into account that deposits for commercial banks in Turkey are currently paying around 10-11 percent it is not surprising that commercial banks are eager to start holding some of the reserves in relatively cheaper gold.
The liquidity freed up in this way could be used for extending loans that, on the one hand, finance investment and support economic growth and, on the other, provide a lender’s income.
There is no increase in the risk of financial meltdown and no significant increase in inflationary pressures, which would result in a normal reduction of the reserve requirement ratio. An additional benefit of this system is the improvement of the credibility of the central bank of Turkey by increasing its reserves in gold. Within just two years of introducing the new reserve rules, the value of gold in the TCB (Turkish Central Bank) balance has increased fourfold.
This has significantly increased the import of metal to Turkey to cover banks’ growing demand. The system enjoyed the momentum in June 2013, when more than 250 tonnes of gold were deposited, and the amount at the central bank exceeded 500 tonnes. Just two years earlier, it had been 116 tonnes.
Later, the lira began to weaken due to protests in Gezi Park, which increased the relative attractiveness of foreign exchange deposits.
Although most of the bank accounts denominated in bullion are virtual, and customers buy raw materials through a bank, the market has been able to pull off some ore.
According to the Regulatory and Banking Supervision Agency, by the end of 2016, 51.6 tonnes of gold worth $4.5bn were collected from the Turks. A significant increase occurred in December last year. Shortly after that, the lira was weakened against the dollar by about a third and inflation accelerated to 11%.
Even President Recep Tayyip Erdogan appealed to foreign currency exchange for lira and gold, which was supposed to help the local currency plummet. Turks reluctantly put savings in their currency, but they were eager to buy precious metals.
In March 2017, imported gold amounted to 28.2 tonnes. Taking into account the scale of purchases and the already accumulated gold, the household resources of 3500-5000 tonnes has little chance of joining the financial system.
The main problem in collecting gold from the Turks is their approach to saving. They are not convinced by the interest offered by banks because they do not treat precious metals as a profit-driven investment. They also hold a large proportion of their assets in jewellery, which usually has some sentimental value.
Although there is still a lot to be done on the topic of gold circulation, there are already some successes in this area. The bullion market was liberalised in 1984, which allowed imports. By 2011, Turkey has been covered by a network of branches of banks where gold could be valued and deposited.
There is also a national market price correlated with bullion prices in world markets. The existing infrastructure is now able to convert large amounts of gold into savings and then facilitate reinvestment. This is intended to benefit the government.
In April 2017, Deputy Prime Minister Mehmet Şimşek announced the implementation of two additional financial instruments based on ore. These are government-denominated bonds and leasing certificates. Interest on them will, however, be paid not in gold, but in Turkish lira, although their indexation will take place at current metal prices. Their redemption will be possible in both cash and bullion. The government encourages this type of investment, pointing out that it is in line with Sharia law.
The Government’s Needs
The government counts not only on the inclusion of jewellery in the financial system but also the inclusion of citizens themselves.
It is estimated that around 19m Turks are financially excluded and do not have bank accounts. The government hopes that by encouraging them to bring their gold to the nearest outlet, they will learn more about the other products, thus making the financial system more robust.
Foreign countries are less willing to meet Turkey’s borrowing demands, which is reflected in the lira’s falling value. It is therefore not surprising that the Turkish government is seeking funding opportunities from its citizens.
Another appeal from President Erdogan to patriotic Turks is likely; this time he will call for the purchase of government bonds denominated in gold.