(Bloomberg) — Turkish officials have been scrutinizing repo-like transactions by local lenders that allow them to access cheaper lira funding abroad and which may be inflating official data on foreign inflows, according to people familiar with the matter.
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The central bank asked several banks for more information about the transactions, also known as sell/buy-backs, in recent weeks, the people said, asking not to be named because the requests weren’t public. Some local lenders have paused those transactions following the inquiries, the people said.
A spokesperson for the central bank said that such transactions have been under officials’ radar in recent months and are routinely audited.
Knowing the volume of the sell/buy-back transactions gives a fuller picture of how much foreign money has actually been invested in Turkish local debt. Attracting inflows to lira bonds has been a key goal of the economic administration as it seeks to normalize the market after years of unorthodox policies, and to boost the appeal of the local currency and stabilize the exchange rate.
Morgan Stanley strategists led by James Lord estimated last month that the total number of such transactions was between $9 billion to $12 billion, according to two different assumptions used in the calculations. That would be the majority of the $14.2 billion that official central bank statistics show as foreign inflows this year.
Cheaper Abroad
The sell/buy-backs, because they’re carried out abroad, can inflate data tracking overseas inflows into Turkey because they’re neither real external investments in Turkish assets, nor are they classified as repurchase agreements, or repos, which must be reported as such to regulators.
The trades are similar to repos, a form of short-term borrowing that allows dealers of government securities to lend them out to raise capital and then buy them back later. The main difference between the two is that in a repo, an interest rate is used to determine the sum of money that is repaid at maturity. In a sell/buy-back, a spot and forward security price are used.
Unlike repos, sell/buy-back transactions are also not subject to withholding taxes or reserve requirements, according to people familiar.
In Turkey, banks have been selling or lending their lira bonds to foreign counterparts, then buying them back via forward agreements. Such transactions help them get lira liquidity at cheaper rates than are available at home.
