Turkey secures foreign swap line with Qatar but economic challenges remain

The recent financial deal reflects Ankara’s growing reliance on Doha for economic protection and to fund its war efforts, particularly in Libya.
Thursday 21/05/2020
Turkish President Tayyip Erdogan meets with Qatar’s Emir Sheikh Tamim bin Hamad al-Thani in Doha, last November. (Reuters)
Funding wars. Turkish President Tayyip Erdogan meets with Qatar’s Emir Sheikh Tamim bin Hamad al-Thani in Doha, last November. (Reuters)

LONDON--Turkey secured a fresh source of foreign currency from an exchange deal with gas-rich Qatar, as Doha looks to help Turkish President Recep Tayyip Erdogan fund war efforts in Syria and Libya.

Doha’s move to rescue Ankara comes at a time when the Qatari economy, like others across the globe, is reeling under the impact of the coronavirus pandemic.

“With the swap amendment agreement, the overall limit has been increased … to $15bn equivalent of Turkish lira and Qatari riyal,” the Turkish central bank said in a statement on its website.

This will facilitate “bilateral trade in respective local currencies and to support the financial stability of the two countries,” the statement added.

The lira briefly gained ground after the announcement, before edging even lower against the dollar.

Ankara had been urgently seeking access to funds from Doha and other allied countries to head off a potential currency spiral, and analysts say tens of billions of dollars might be needed.

The deal was seen as an attempt by Qatar to pay Ankara back for its support after Doha was boycotted by four Arab countries, including its Gulf neighbours, in 2017. At the height of the crisis, Turkey stationed troops and steadily built up a base in in Qatar as a show of support.

The recent financial deal reflects Ankara’s growing reliance on Doha for economic protection and to fund its war efforts, particularly in Libya, which is considered a high stakes conflict for Qatar and its Islamist allies in the region.

With a degree of financial relief, Erdogan hopes to ease unrest at home, showing financially burdened citizens that Turkey is not bearing the cost of the war alone.

In recent years, Qataris have found Erdogan to be a reliable partner in furthering their Islamist agenda through a vast network of Muslim Brotherhood affiliates throughout the world.

The objective of Qatar and the Muslim Brothers has been to target the security and stability of Arab countries through hostile campaigns or direct interventions, such as in Syria and Libya.

As Turkey ran down its hard currency buffers this year, it lobbied the Group of 20 nations to be included into swap lines that the US government has extended to other nations, albeit without success, according to Bloomberg.

So far unable to reach arrangements with the central banks of G-20 nations, Bloomberg reported, Turkey had to seek new sources of funding elsewhere.

The coronavirus pandemic has had a severe impact on Turkey’s economy, leading to renewed pressure on the lira amid investors’ concerns.

In March, the International Monetary Fund estimated Turkey’s GDP would shrink 5% this year, compared to growth of 0.9% last year. The IMF also predicted that unemployment in the country would surge to 17.2% from 13.7%.

The lira plummeted to a historic low earlier in May, accelerating Ankara’s overseas funding search.

Last week, officials from Turkey’s Treasury and central bank appealed to counterparts in Qatar and China about expanding existing swap lines and reached out to the United Kingdom and Japan about establishing new ones.

Turkey has a roughly $1.7 billion swap facility with Beijing.

Over the last eight trading days, the lira has rallied on expectations of new funding. Some analysts said the volatility and a 14% drop so far this year risked escalating as in 2018, when Turkey’s currency crisis shook emerging markets.

“The extra $10 billion is a drop in the ocean compared to Turkey’s external funding needs,” especially given hard-hit tourism and trade have widened the current account deficit, senior economist at Capital Economics Jason Tuvey told Reuters.

“We could see pressure on the lira start to mount again” if the Bank of Japan and Bank of England rebuff Turkey, he said.

Net FX reserves at the central bank have fallen to $26 billion from $40 billion this year, in part due to state bank FX interventions to help stabilise the lira, analysts say. Turkey’s 12-month foreign debt obligations are $168 billion.

Goldman Sachs analysts said the boost from Qatar “only closes roughly a third of the funding gap we see for 2020.”