The Kapali Carsi

Turkish Monetary Policy Committee Preview

Although there are still seven hours to Wednesday for the closest Yanks to Turkey, as the clock has ticked midnight here, we can officially call it MPC day:  At 14.00 Turkish time (12.00 GMT, 07.00 ERST), the Monetary Policy Committee, or MPC, will release its last meeting decision before the June 12 elections. There has been some rumor in the last couple of days that the Bank will introduce reserve requirement ratios, or RRRs, to swap transactions. I should say outright that I do not buy those rumors, and I will explain why at the end of this post. But before, it is useful to go over the rationale of those rumors, as they would make a good summary of the Turkish monetary policy dilemma:

Standard economic theory would tell us that, with the recent RRR hikes, money multipliers should have collapsed, and as you can see below, that is indeed the case:

But this is where the economic theory seems to stop working. If money multipliers have collapsed, how come can credit continue growing at such a robust pace? The answer lies what is happening the the assets side of the banks’ balance sheets. Banks are simply offloading securities, which are mainly Turkish Treasury bills and bonds, to be able to lend more:

Sorry for the missing data in loans; I don’t know what is going on with my data program, but you get the idea. Anyway, here’s the same idea presented a little bit differently, i.e. as ratio of loans and securities to deposits:

Of course, we should render onto the Central Bank what is the Central Bank’s. The banks can pull this trick because the Central Bank has been providing liquidity through Open Market Operations. As you can see below, the reverse repo stock is now around TRY 50bn:

Then, the question a reader brought up, as a comment to one of my final posts over at the old blog, is why the CBT is doing this. Well, if they don’t, the overnight rate will go up, and the country will be attracting hot money parking at the overnight again. This is the inherent dilemma of the CBT’s policy. BTW, have a look at that reader’s comments, especially if you want a good intro. to Turkish monetary policy; she has some quite good observations.

But that’s not all: The banks are funding the loans also by swaps with foreign (i.e. non-resident) banks, mainly against the resident FX deposits they are carrying over at their liabilities:

Whereas there has always been a relationship between banks’ off-balance sheet position, which is a good indicator of their swaps, and their FX deposits, that relationship has been very tight as of late.

So you now know the rationale behind the swap RRR rumors. But will they do it or not? Not likely, as that move could bring a lot of volatility to the lira. It would also mean double-RRRs in most cases: For example, for the swaps funded by syndicated loans or FX deposits, the CBT would be asking for two RRRs from the same transaction. Moreover, as @inancsozer was noting over at Twitter, there has been a sharp drop in FX credit as well as a decrease of USD 5bn in swaps (see how my blue line drops above). He also notes that with FX liquidity weak, RRR to swaps would require guts! I agree with him, except that I don’t think FX credit would be important for this story.

Besides, if you think that Erdem Basci’s long-term friendship with Econ tzar Babacan and his closeness to the government are important (I don’t think they are, but you are more than welcome to adopt a political economy approach to all this), the case against doing something like this two and a half weeks before the elections becomes more stronger.

But let’s wait and see… I will have some sort of “my take on the meeting” after the MPC…

BTW, all charts are courtesy of my friends at Turkey Data Monitor.

15 Responses to “Turkish Monetary Policy Committee Preview”

L_GMay 26th, 2011 at 11:08 pm

Dear Mr Deliveli,

As I understand your piece, banks burn some of their fuel by selling their treasury bills. What do you think, how much does this contribute to credit expansion, and how much is accountable to the reverse repo operations?

I think this ratio may be crucial, because if the reverse repos are what count more, it means the CBT policy is not working at all, and then after the elections there is nothing else that can stop the credit expansion and a sell-off of the lira than an interest rate hike, which may be both sudden and sharp, as the Bank is already behind the curve.

Over at TEPAV Fatih Özatay paints a kind of uncertain picture regarding this, but as I understand his recent commentary, he thinks there is a slight chance for some negative scenarios to happen. From that perspective, I think there are two dangers: first is about the lira depreciation I already mentioned (which on the other hand is dependent on how much lira stocks foreign investors have), and the second is about the stability of the banking sector. If the government and the CBT does not act in concordance and in the right direction, there can easily be a financial and exchange rate crisis.

It seems strange to me the Turkish leadership is not communicating its intention to avoid such a scenario. Or maybe I missed a detail?

BTW, thanks for mentioning my comments in your article, though I have to say I actually am a he :).

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Emre Deliveli edeliveliJune 5th, 2011 at 11:00 am

Dear L_G,

Another comment to which I had responded, but my response has disappeared:) Pity, as it was a thorough response, but let me try it again:

Good point on where the Funding is coming from. I don't have the exact numbers on how much banks are using banks use repos, bonds, foreign currency deposits, external borrowing or swaps as funding alternatives, but that would make a nice post. I can at least try to find a banking report that has attempted this.

I am feeling more and more that the CBT and the government are not worried about lira depreciation because there isn't that much FX open positions. BTW, measuring that is not very easy, but Haluk Burumcekci, formerly at Fortis, now at EFG Securities, used to do this; I am sure he still does, but I don't have access to his research anymore. Similarly, the banking sector is robust, they probably think. I see their points, but don't agree with their accommodative stance for the effect of a large depreciation on inflation, especially when there isn't much of an output gap- this is where I disagree with the CBT as well…



P.S. "She" is my default reference, for PC reasons:), but I will refer to you as a "he" from now on, but you'd have to let me know if you have a sex change operation:… Apologies for my bad sense of humor, but since you've been reading my stuff for a while, you can probably put up with it:)…

L_GJune 5th, 2011 at 5:20 pm

Dear Mr Deliveli,

It is really a pity that thorough posts just disappear. Sometimes it happened with me as well, and it is kind of annoying. But I guess and hope this was just a temporary phenomenon.

Regarding the funding source, and the source of such data, I thought there is some authority which checks it. Seems like it is not as easy.

What do you mean exactly by saying they are not afraid about lira depreciation, because there isn't much FX positions? Are you referring to the "general balance sheet of Turkey", or of some particular institutions like the CBT, the government or banking sector? I would guess you mean that there is a ,,floor" under the lira, as there is not much lira stocks which could be sold, therefore further depreciation is limited.

On the other hand if this increases inflation, which it probably does, I agree they should be less accomodating to the current exchange rate. Though I have noticed you avoid saying there will be an interest hike, you rather say there will be tightening. Which I take as a subtle hint you still have doubts if they are going to hike or not.

Yes, I can put up with it :). It is a good thing to have some funny stuff around.


Emre Deliveli edeliveliJune 5th, 2011 at 9:29 pm

Dear L_G,

The disappearing posts is a temporary thing; we are all (me and Roubini IT people) are trying to get used to the new platform…

As for funding, there is the data, but it is in different places, so you just have to sit down and compile everything. Even then, it is an inaccurate picture.

I meant to say that corporations don't have huge open FX positions, i.e. currency mismatches. So they won't be influenced a lot if the currency depreciates suddenly.

The FX passthrough (to inflation) has been muted for the past couple of years because 1. there wasn't much of a depreciation. 2. There was a lot of slack of demand. None of these conditions holds any longer!

I was just using tightening as a general term, but reserve hikes are more likely than rate hikes, especially in the next few months.



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GonzaloJune 27th, 2012 at 7:06 pm

What measures do you believe CBT should take in case european situation continues to deteriorate and as a consequence a greater capital outflow? Is this different if inflation pressure continues? Finally, does monetary policy restrain fiscal situation.

Sorry for my bad english. I am a student of economics.

Emre Deliveli edeliveliJune 28th, 2012 at 4:54 am

A normal emerging market central bank would increase interest rates. It is a bit complicated for Turkey, as the Central Bank uses a policy window where they conduct rates.

Inflation will not be an issue because higher rates will keep inflation in tab. The problem here is that growth has already slowed down quite a bit, and the Bank may not want to slow it down further with higher rates.

Rather than restrain, monetary policy has to work in tandem with fiscal policy. Turkey has quite a bit of fiscal space, so if rates were to go up, policymakers may want to make up for it with a looser fiscal stance…