Turkey’s Hedge Funds Are Latest Casualties of Currency Clampdown

(Bloomberg) --

Turkey will no longer allow investors to set up hedge funds that invest primarily in foreign-exchange assets and will start taxing existing ones, the latest measures designed to clamp down on local demand for hard currency.

The Capital Markets Board said it has suspended approvals for funds whose foreign exchange-denominated securities make up at least 80% of total holdings. The government will impose a 15% tax on the management of such funds, according a presidential decree.

At roughly $3 billion, the size of the funds affected by Wednesday's measures is relatively small, especially when compared to the $195.7 billion of hard-currency deposits held by households and businesses. But moving to restrict this corner of the market shows authorities are determined to limit the persistent demand for foreign exchange, which threatens to weigh on the lira after it slumped to a record low last month.

“Recent measures are designed to further clamp down on FX demand,” said Evren Kirikoglu, an independent market strategist in Istanbul. “These limitations do not apply to domestically issued FX-debt though, probably because the domestic FX market will be the main source of FX funding going forward.”

The measures also come days after regulators hiked the tax on individual foreign-currency purchases. A string of earlier restrictions effectively banned local banks from trading the lira with foreign institutions by capping the amount they can lend offshore to just 0.5% of their equity.

Critics have argued that the country is edging toward some form of capital controls by limiting the exchange of the Turkish lira. The government has repeatedly denied having such motives.

That would be anathema to many investors after Turkey has maintained one of the most open capital accounts in the developing world. It still relies heavily on foreign inflows to roll over its obligations.

The lira has lost 12% against the U.S. currency since the beginning of the year and was trading 0.7% weaker at 6.7575 per dollar as of 1:59 p.m. in Istanbul.

Inflation Hedge

For local savers, holding foreign currency is a way to hedge against the depreciation of the lira and deposit rates that don't compensate them for inflation.

Data on Wednesday showed annual price gains unexpectedly accelerated to 11.4%, while the median estimate in a Bloomberg survey of economists predicted little change from the previous month.

Turkey's push for faster credit growth and cheaper money has pushed the average rate lenders offer for one-month lira deposits to 7.3%, the lowest level since 2013.