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“Official CBRT daily and weekly figures continue to show an adverse dynamic in net reserves,” notes  Cristian Maggio,  Head of Emerging Markets Strategy at TD Securities and elaborates:

“The CBRT has recently fallen in the crossfire of a controversy about the stated size of its Net International Reserves (NIR). The Financial Times started the skirmish arguing that the CBRT books USD spot purchases, resulting from FX swap contracts, to the asset side of the balance sheet, but does not do so with forwards  deriving from those same swaps in the liabilities section. As a result NIR would be overestimated by an amount equivalent to the size of CBRT’s cumulative open swap contracts.”

“If the CBRT decides to change its accounting practice or simply phase out existing swaps going forward, NIR remain set to shrink further. This will certainly be the case unless: 1. Other assets increase, or 2. Other liabilities fall. Neither seems a very likely option, which leaves NIR on a declining trajectory to reach a level at around $15-16bn in the coming weeks if all swaps are phased out or forward commitments booked back in the liabilities side of the balance sheet.”

“This assumes no further decline in NFAs compared to levels on 26 April at $23.3bn ($15.9bn when swaps are netted out). But even if the CBRT decides to leave its accounting practices unchanged, the dreadful dynamic of NIR will not go unnoticed. Tomorrow, the CBRT will have to provide, at the very least, an extremely solid explanation as to why markets should be looking at the official numbers rather than the swap-adjusted figures. Missing a convincing explanation, the risk of an accentuated TRY selloff stays high.”