Dollarization Returns: Citizens and Firms Flock to FX as KCM Fades Away

Following a brief respite, the feared landscape in the Turkish financial system has returned; as citizens and corporations turn to foreign currency once again, the tremor in confidence regarding the local currency persists, and the state's primary support mechanism, KCM, fades into history.

The Hunger for FX and Public Flight

Data from the Central Bank of the Republic of Türkiye (TCMB) clearly reveals the sentiment in financial markets for the week of August 7. Following a decline of $3.548 billion in the previous week, markets made a sharp turn, channeling funds into FX deposits.

■FX deposits adjusted for parity effects increased by $1.77 billion last week.

■FX deposits of real individuals rose by $1.403 billion, proving that citizens are the main driving force behind currency demand.

■Corporate deposits also increased by $368 million, indicating that companies are also willing to take on risk.

The Final Breath of KCM

The exit process for the FX-Protected Deposit (KKM) system, one of the most expensive and controversial tools of economic management, is accelerating. The market's abandonment of this mechanism is not just a data shift, but a change in preference.

■The KCM balance decreased by 106 million TL last week, falling to 51 million TL.

■This decline is a clear indicator that the system has effectively ended and the market is turning to unprotected deposits or directly to foreign currency.

The Expanding Cycle of the Banking Sector

Data from the Banking Regulation and Supervision Agency (BDDK) indicates that the sector continues to grow in terms of credit and deposits, signaling that the costs of this growth are being passed on to households.

■The banking sector's total credit volume rose by 47.53 billion TL to 27.48 trillion 976 million TL as of August 7.

■Total deposits, including interbank, reached 31.28 trillion 101 million TL with an increase of 366.48 billion TL.

The fact that citizens are buying foreign currency again indicates that belief in the future of the TL is broken despite high interest rates. Although banks have hit a record by pushing the credit volume over 27 trillion lira, this borrowing frenzy implies an interest burden that will break the consumer's back. The drop of KCM to 51 million lira is now a formality; the system is returning to natural equilibrium, meaning foreign currency demand.