Turkey's Central Bank to manage exchange rate risk

By Zeynek Akyil Karayel and Bahattin Gonultas

ANKARA

The Turkish Central Bank is expected to introduce a new instrument in the upcoming days to help manage the corporate sector’s exchange rate risk, according to Erkan Kilimci, its deputy governor.

Erkan Kilimci said the Central Bank has devised the “Systemic Risk Data Monitoring Model” to establish a sound monitoring and analysis mechanism to address the exchange rate risk of the corporate sector and, as stage of this process, it has created a comprehensive data set to monitor FX positions, cash flows and the use of derivative products on a firm basis.

"With the draft law currently under consideration, we aim to increase the effectiveness of the process through which information and data are collected from the corporate sector. This work will contribute to the establishment of a more effective legislative framework for the management of the exchange rate risk,” he said.

Kilimci emphasized that effective exchange rate risk management was important for financial stability and price stability.

"For the sake of financial stability, it is critical that firms are not negatively affected by possible market fluctuations. Corporate sector firms that effectively and adequately manage their risks are more resilient to short-term market fluctuations and are also able to manage their operational decisions focusing on the medium and ,” he said.

Moreover, Kilimci added that sharp movements in exchange rates pose a significant risk to price stability and undermine the effectiveness of the monetary policy implemented.

“Therefore, an effective exchange rate risk management by the corporate sector will contribute to maintaining market balances and curbing adverse effects of exchange rates on pricing behavior,” he said.

Kilimci stressed the importance of encouraging firms to implement effective risk management and contributing to the development of suitable markets and instruments are of utmost importance.

"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.

"In non-deliverable foreign exchange forward transactions, 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.

"In this way, 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," he explained.

Kilimci also said the fact that banks will be able to make transactions with the Central Bank will decrease transaction costs.

One dollar traded at over 3.86 Turkish liras last Monday, up from 3.57 as of Sept. 29 marking a 5.6 percent monthly hike in the USD/TRY exchange rate. The average USD/TRY exchange rate was 3.66 in October and 3.47 in September, while the 10-month average rate was 3.61.