Central Bank of Turkey Monthly Meeting: Yet New Rabbits!
Not the monthly rate-setting MPC meeting, but the one for bank economists…
The Central Bank held its monthly meeting with bank economists this morning. Since they really pissed me off by saying that I, as a journalist, would not be admitted (I think it is an insult to my journalist friends to consider me one, as I am interested, above all, in telling what I am thinking rather than report what others are thinking!), I am making it a point to do detailed posts on what was spoken at these highly-clandestine meetings, thanks to my highly-clandestine sources:)
Anyway, the presentation does not offer much new. The only points worth noting are: 1. The Bank continues to see the lira 5-10 percent undervalued. 2. The Bank is making a point to show that the FX sales are not much for now. They do that by showing the sales until now are much lower than the purchases earlier, and looked at historically, reserves are still very high. I am not going to argue with them, but that is really not the best way to gauge whether a country has enough reserves or not!
The third point is the most interesting one: In the last couple of pages of the presentation, the CBT suddenly starts talking about FX-weighted credit growth, making your friendly neighborhood economist wonder if the Bank is pulling yet another rabbit out of the hat, to make sure the 25 percent target (or rather desired, as we are not a command economy after all) credit growth would be achieved.
That may be one of the reasons, but the real raison d’etre of the change in methodology is in the last sentence of the whole presentation: The CBT is basically saying that they will let the banks hold the lira required reserve ratios, or RRRs, in FX.
Now, you don’t need to be a genius to figure out that the CBT is cutting the banking sector a big deal by doing this, as this will be at much lower-cost than borrowing FX from abroad. It will also help the Central Bank with its decreasing reserves (Governor Basci also noted that increasing EXIM-Bank credits would help in that regard as well, but as far as I know, that’s not the Bank’s domain).
But I am confuzzled (confused & puzzled) on how the measure would lessen pressure on the currency, as Basci is claiming. The economists I spoke to are as confuzzled as I am, and the only explanation they (and I) could come up with is that the mechanism would be through swaps: By decreasing the need for swaps, it could limit the depreciation pressure from that channel. Otherwise, it should not make a difference whether a bank is changing FX with another bank or with the Central Bank.
The next question is to what extent the Bank will allow banks to exchange lira RRRs with FX. In the Q&A, Basci said “for example, 10 percent, but not 100 percent”. Again, you don’t need to be Einstein (or Keynes) to figure out that if the banks are not constrained, they will undertake the scheme until their lira and FX funding costs will be roughly equal (or am I missing something?).
As for the timing of the measure, Basci noted that, since it did not require an MPC meeting, it would be enacted right away.
So you now know how the FX-adjusted credit growth fits into the big picture. Coming back to that, Basci said that they are still targeting 25 percent credit growth for this year, although the figure is now FX-adjusted, with the methodology of the adjustment being the same one the Bank had disclosed a few months ago. As for next year, Basci did not mention anything specific, just that credit growth could be less than 25 percent, but as one banker noted in the meeting, the banks will be constrained by their capital adequacy ratios in any case. They wouldn’t be able to maintain 25 percent credit growth in the domestic and global conjecture even if they wanted to! BTW, in true Soviet style, Basci noted that they would not be happy if credit grew less or more than 25 percent! I wonder if he has a band or confidence interval?:)
As for inflation, Basci acknowledged that end-year inflation will come above the 6.9 percent in the latest Inflation Report. According to him, that’s mainly because of the higher FX pass-through, apparent in the latest inflation turnout (I will blog on that tomorrow) but he did not give a figure. We’ll soon be seeing a lot of forecast revisions, as quite a few analysts had penciled in 7 percent for end-year inflation, in admirable “in CBT we trust” manner…
Speaking of forecasts, one economist friend noted she was perplexed with Basci’s current account deficit projections: Although the Governor continued to underline that they are expecting very low deficit figures in the next few months, his end-year deficit expectation is still slightly below 10 percent of GDP. BTW, I tried to poke my economist friends by suggesting that Basci had said the deficit would be USD 5bn in July, but that it will probably be USD 5.5-5.6bn (I can be so accurate because I have the trade figures at hand). But my friends told me he had actually said “around USD 5bn”, and I guess USD 5.5bn is still “around”…
As for global development, Basci seemed to be worried about Europe, especially Berlusconi-land: He emphasized that Italian spreads are moving up again: FYI, the interim meeting with the rate cut early last month happened while Italian spreads were above 6 percent (it also happened while I was waiting for my luggage at Heathrow, but I somehow think that did not figure a great deal in the MPC decision, unless they thought I would ruin the U.K. economy with my presence there). They were below 5 percent for a while, but they are now hovering around 5.6 percent. BTW, I learned that many Turkey economists are following these spreads closely, even though mainly to predict CBT behavior… I guess they really take Basci seriously:)…
Basci noted that the main channels of contagion from an Italian collapse would be trade and banking. He does not foresee trade being a big problem, as he thinks that exporters are able to shift temporarily to short-term decision-making/commitments in those circumstances. As for banking, while Basci confirms that there are Turkish banks using European banks for funding, Turkish banks are able to obtain syndicated loans rather easily for the moment.
Last but not the least, Basci mainly referred to RRRs as the monetary policy tool; it seems rate cuts are out of the picture given the challenging inflation outlook. But as for the direction of monetary policy, Basci said that they are still not sure if the world is going towards the recessionary/deflationary or inflationary scenario. Therefore, they are in a wait-and-see mode for the moment.
One Response to “Central Bank of Turkey Monthly Meeting: Yet New Rabbits!”
Turkey is far from being on solid ground. Indeed, economically Turkey is no better than a paper tiger, hiding a galloping crisis behind its anti-Israel rhetoric:
1. Ankara's published impressive GDP growth rate of 11 percent is artificially inflated by out-of-control credit pumped out by its central bank to create a short-term bubble. In fact, Turkey is fast sliding into deep economic slump. Its current account deficit has reached almost the same crisis level as those of Greece and Portugal and its currency faces devaluation.
Source: US sources: Turkey's sharp economic downswing undercuts its regional status. DEBKAfile, September 4, 2011 http://www.debka.com/article/21269/