I’ll Never Ever Criticize the Central Bank of Turkey Again!
I know this is a promise I won’t be able to keep, but I just want to have that title as a reminder to myself to empathize with the Central Bank of Turkey the next time I feel criticizing its policies or governor, as I was doing in my last Hurriyet Daily News column, which was also posted here at the blog.
This is because I was reminded once more of the constraints facing the Bank when PM Erdogan had salep (a hot winter drink Turks love, goes great with cinnamon) with journalists last night. Here’s the full thing, as reported by my favorite Turkish daily Radikal and business daily Dunya. In case you don’t speak Turkish, the PM told journalists that the wedge between policy and market rates had to close (towards the policy rate, which is at 5.75 percent, or 5.8 percent, as rounded by the PM). Moreover, he continued with his earlier claims that higher interest begets higher inflation, correcting a common mistake among economists:) He also said that the “interest rate lobby”, a fictional alliance supposedly led by foreign financiers trying to suck Turkey dry, like the giant vampire squid, was at work again, and that the government would counter them with full force.
Here are several things that crossed my mind as I read the PM’s remarks:
- Is the Central Bank doing all these unconventional policies so that the PM would think the interest rate is low?:)
- How can I now criticize the Central Bank for not raising the policy rate?
- Similarly, how can I criticize the Turkish daily Sabah for making up conspiracy theories about the “interest rate lobby”?
- Doesn’t the PM have a single adviser who has taken a single econ. course at college?
Anyway, I wanted to start my usual addendum to my latest HDN column with this because I think it puts many things into perspective. But I will now switch gears and discuss Central Bank of Turkey Governor Erdem Basci’s Friday speech, which the column was about.
I personally thought Basci’s speech was very good, except the times when he spoke about the exchange rate 
For one thing, even if you didn’t agree with what he was saying, you would agree that he was speaking very clearly, spelling out his assumptions plainly. But the problem was that he spent a good chunk of his speech talking about the exchange rate.
On that, I will remember the rule I set out for myself above and try to empathize with the Governor. Economist (and former Treasury Undersecretary) Mahfi Egilmez recited an old Chinese story about holding a tiger by the tail to explain Basci’s fixation on the exchange rate. As I found on the web (at a finance site nonetheless), “the old Chinese proverb holds that if you are riding on the back of a tiger, or holding a tiger by the tail, do not dismount or let go, as you will be eaten.” In other words, once Erdem Basci unexpectedly started talking about the currency in August (I was very surprised at the time, as I had watched him say clearly in Denizli in July that the Bank would not discuss the currency), he basically entered a road of no return. He now has to speak more and more about the exchange rate every time to make sure he won’t be tested. And once you start talking about the currency so much, no one will believe that you are not “targeting the exchange rate, no matter how many times you say it. In fact, there is now a conviction in the Turkish finance community nowadays that the Bank will not have “exceptional days” as long as the exchange rate basket does not hit 2.15.
This is not good: I don’t think any central bank under a flexible FX rate regime would want to be seen as an FX targeter. But then again, once the tiger is out of the cage, you can never let her go. As for my general point on the bank behaving like a hedge fund: I already mentioned about the events of December 23rd in a previous post. Moreover, Basci was boasting at the Bursa speech that the Central Bank had made a record profit in 2011 from its currency activities. It is not the only central bank winning big time from its operations. But this should be a consequence of a central bank’s policy actions, not something to show off and definitely not a performance criterion.
As for the “lira beating the dollar”, it might or it might not; that will mainly be based on factors beyond the Central Bank’s control, but I find it very odd that Basci is so confident, in fact enough to put his reputation on the line, on something he can’t control. As I mentioned in the column, the deciding factor, IMHO, will be Eurozone woes. Of course, another necessary condition would be for the Fed not to start raising rates and continue with its current monetary policy stance. That is pretty much given, although I cannot be so sure about the Eurozone. BTW, while latest data show that flows to emerging markets have not picked up yet, at least enough to support Basci’s main scenario, quite a few people think that EMs will actually get lion’s share of flows this year.
BTW, Basci made an even bolder statement, that the lira would be one of the EM currencies that would appreciate the most this year. I find that hard to believe, especially with the current account deficit and inflation outlook I outline below. Basci trusts the Central Bank’s unique set of tools to ensure lira overperformance, but they could easily cause underperfomance as well.
One side effect of all this currency talk was that the Central Bank’s main message, that they would return to “normal days” as soon as they got what they aimed for (which is what exactly, stemming lira depreciation?), got lost. In fact, yesterday and today were both normal days.
In any case, as Radikal columnist Ugur Gurses tweeted on Friday, I wish the Governor was as confident on the inflation or current account deficit as on the lira:) Speaking of those, Citi Turkey economists have the details, but today’s BOP figures were largely positive, with the 12-m current account deficit decreasing for the first time in 2 years:
And let me update the table I used in the column/blog post while I am it:
And while the adjustment process has begun, note that there isn’t agreement on the pace of adjustment, with your friendly neighborhood economist asserting it should be slow because of simple algebra, but Yapi Kredi economists claiming it will be fast because of exchange rate dynamics- have a look at the earlier post where I address this in more detail. Besides, I am not very optimistic on the external financing outlook, although the private sector continues to be able to borrow. For one thing, portfolio flows & short term debt have started to creep up, while FDI & long-term debt are decreasing.
As for inflation, I had argued before that the Central Bank’s rosy outlook depends on several key assumptions, one of them being oil prices. The rising tensions between Iran and the United States (and EU)is endangering that assumption this early in the year:
At the end of the day, Turkey could see some reduction in the current account deficit as well as inflation, if it could forgo growth. As ex Central Bank Governor Durmus Yilmaz (currently chief econ. adviser for the President), who has been getting Turkish daily Sabah’s arrows of late for his candid remarks on the economic vulnerabilities, noted, the government target of 4 percent growth this year is achievable (sorry for the Mann/Proust sentence). But the real question is, as Yilmaz highlighted, is whether it is sustainable and desirable. I would add that accepting no or little growth this year would also ensure a soft landing, while insisting on the 4 percent target (and acting accordingly) could lead to a crash landing….
Finally, there has been a heated debate going on in Turkish economics circles on whether the country’s reserves are enough, as summarized recently by the Financial Times. Those who think they are not say that it is the net reserves that matter, and those are around USD 40bn, as I discussed in a recent blog post. I agree with the opposing camp that net reserves are not a good gauge (see here for a column along those lines- in Turkish); that’s why I was using overall reserves to calculate the indicators in the column. For the interested reader who speaks Turkish, Saruhan Ozel goes over my indicators as well as a coupe of additional ones to conclude that (in Turkish) reserves are adequate for the moment, but are nevertheless decreasing dangerously fast.
As a related footnote, I would urge you to read Seyfettin Gursel’s column at today’s Radikal- again if you speak Turkish:( He basically notes that traditional monetary policies would not be able to reduce the current account deficit/credit growth and tame inflation without causing the exchange rate to appreciate significantly. He urges critics of the Central Bank’s unconventional monetary policy, like your friendly neighborhood economist, to come up with an alternative policy. I totally agree with him, but the point is that no central bank, not just the CBT, has the tools to address these issues, despite Basci’s claims otherwise. as I explained some time ago. The current account deficit could more effectively be targeted with tight fiscal policy (the traditional way). But then again, it is Pollyannaesque optimism to assume the government would tighten the belt before a potential referendum on the new Constitution as well as presidential and local elections…
4 Responses to “I’ll Never Ever Criticize the Central Bank of Turkey Again!”
netpublicus • January 13th, 2012 at 2:33 pm
Sir, I like you articles, thank you!
Many voices blame excessive consumer spending (and credit growth) for Turkey's non-energy current account deficit. Without denying that, I wonder if it is rather a structural problem of Turkey's industry. Turkey imports many semi-finished goods before processing and re-exporting them. What do you think, Sir?
edeliveli • January 17th, 2012 at 7:28 pm
Sorry for the late response: There is that, and even more elemental that that, the problem is that Turkey just doesn't save enough, which is related to its low productivity as well. See here for the savings: http://bit.ly/y5DzB8 and here for the productivity issue: http://bit.ly/yO4G9w
edeliveli • January 17th, 2012 at 7:29 pm
Oh, BTW, you don't have to call me "sir"; I feel one of those long-moustached old gentlemen enjoying whiskey and smoking cigars in Dickens' London:)
edeliveli • January 17th, 2012 at 7:29 pm
I should have replied my responses; anyway they are under your comments, FYI…
