The Kapali Carsi

The IMF on Turkey

The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Turkey on November 16th and released the traditional short accompanying document yesterday. When I say short, it is really a very short piece, so have a look at it, but here is what I deemed as important.

  •  The Fund notes that there has been quite a bit of rebalancing- slower growth and shift from domestic demand to exports thanks to diversification towards new markets.
  • Inflation is coming down, but it has been boosted by indirect taxes and administrative price hikes, which could undermine competitiveness.
  • The Fund is happy with the health of the banking sector.
  • Lots of fiscal fear I sense: The Fund notes that the primary surplus is lower than last year, and the end-year budget target is being missed because of too much spending. For next year, the Fund simply says, don’t overspend! “Directors welcomed the tighter fiscal policy stance proposed in the 2013 budget, turning around the pro‑cyclical stance of this year and contributing to a more balanced policy mix.” Of course, the Fund would not say they don’t buy next year’s budget, especially since there will be local and Presidential elections in 2014, but I don’t! Also, note that they deem this year stance pro-cyclical.
  • Turkey remains vulnerable to shifts and market sentiment given the large external financing need. Note that this is Turkey’s Achiless’ heel; Fitch upgraded Turkey even though it expects a Balance of Payments crisis somewhere down the road, and this is also the primary reason Moody’s decided not to bring Turkey to investment-grade yet.
  • The Fund notes that to bring the current account deficit to more sustainable levels, the domestic savings rate should rise, and the economy’s potential should be enhanced. By the latter, the Fund means structural reforms.
  • Monetary Policy: This is where the Fund is the most critical. While they accept that the flexible monetary policy has served the economy well in the current environment of volatile capital flows, they also feel negative real interest rates don’t serve Turkey well (they actually say they see “merit in returning to a positive real policy rate”, but they are just being courteous). Why? Although the Fund does not spell this out, you don’t get to increase savings with such low rates. Besides, you are running the risk of jumpstarting credit and growth again, which would bring us back to the unsustainable current account deficit. The Bank could hike required reserves to counter that, but we saw how ineffective those were back in 2011. Or another way to see all this is to note that the government does not see this as a risk, but more like a blessing before a double-election year!
  • The IMF also feels that the communication part is of monetary policy is not doing well, which has been a long-term critique of mine as well.
  • Against excessive short-term capital inflows, the Fund recommends sterilized intervention since they feel reserves are relatively low, complemented with macro-prudential measures. Note that the Central Bank has stated that they are not considering the sterilization option. I am 100% with the Fund on macroprudential measures, as they are the best tools against curbing credit, as proven in 2011. But wait, I thought Turkey had $100 bn of reserves. So what is going on? Are these Fund economists high? No, not really. First of all, net reserves are only $50 bn, as most of the recent increase has been because of the Reserve Option Coefficients (ROCs). But more importantly, traditional reserve strength measures don’t paint a pretty picture. This should not come as big surprise: After all, one “interesting” side effect of ROCs has been to induce banks to borrow short-term from abroad. You reap what you sow, I guess:)….


  • Finally, the Fund has saved the best for last: They note that fiscal policy has an important role to play in increasing national savings. While I respect the government’s noble goal of increasing private savings with private pension reform and the like, I think they have been neglecting fiscal policy a bit. It is good that the Fund is reminding them that.

All in all, I think this is a fairly balanced assessment, which more or less reflects my own thoughts on the status of the Turkish economy at the moment…

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