Sunday, December 26, 2010
Quite a few monetary policy developments have taken place during this past week, so a new round of my proprietary TSL MPW is in order.
First, Governor Yilmaz presented the Monetary and Exchange Rate Policy framework on Tuesday. Other than trivial details such as changing of the time of the MPC and FX auctions, and semi-trivial details such as the CBT would monitor off-balance sheet activities of banks (translation: required reserves on funds through swap operations), I think Citi economists summarize it well when they note the CBT has diluted the inflation framework further: For the better or the worse, the Bank is acting as if it is targeting the current account deficit and/or credit growth!
That theme was even more apparent in Econ czar Babacan's meeting with bank CEOs the next day. The czar had summoned the executives to discuss developments in the Turkish economy and finance sector in 2010 and the 2011 outlook & expectations as well as the latest policies regarding the banks- at least, this is what the press release on the meeting was saying.
It seems that the bankers got some info. on and justification for the current account / credit growth targeting, as well as some numbers on the government's targets- 5.4 percent of GDP current account deficit and 25 percent credit growth. A page from the presentation of Yilmaz, who was present in the meetings as well, to the bankers is especially informative regarding this new framework:
The equation linking current account deficit to credit growth is just a simplification of the capital account, the mirror image of the current account in the Balance of Payments. FYI, here are the main items of the capital account, compliments of friends at Turkey Data Monitor, who have gone to great pains for preparing this table:
While I do not doubt the equation, I have a couple of reservations with this approach: For one thing, just check out the numbers and decide for yourselves if the "other" items are so trivial to group under one item. Besides, there is even a simpler equation, mentioned in the previous slide:
Now, wouldn't it be easier to do something about the public sector savings gap to tackle the deficit? But as I argued before, we are about to enter an election year.
Finally, I have an issue with the credit growth target: Credit grew around 30 percent this year, and with the economy growing at least 8 percent at that! Credit growth of 25 percent would have been quite attainable even without any precautions next year- except unless the CBT/government is projecting very strong capital flows- I would have loved to see their complete projections in Excel...
Anyway, as a general point, I feel that the CBT and the government are creating a lot of uncertainty with regards to their economic goals. I am not saying this as a positive or negative judgment, I felt that the uncertainty created by the Bank back in September and November was more beneficial and than harmful, and it has worked well in many respects, such as the drastic decrease in the share of overnight in total repos and steepening of the yield curve.
But I am not so sure this time around, as many economists are still trying to grasp what exactly the government and the Bank are trying to do. This is because the government/CBT want to react to global events that may have conflicting policy responses and have just too many objectives at the end of the day. This point is elaborated by Atilla Yesilada in a column at his Bilgeekonomist website. He also underlines that although the government and the CBT have identified the symptoms very well, they are not sure about how to treat the illness. I am not sure if Atilla would agree with me, but I think this is really where the confusion is coming from.
BTW, I see more and more often that an understanding between the relationship between different sectors of the economy (real, monetary, BOP, fiscal) is necessary to have a god grasp on what the CBT is doing. Luckily, I have a very good exercise, suited to people who know the basic relationships, on how the different accounts are linked. Try to work through the questions, check your answers and go through the explanations. Of course, if you have nothing better to do on a Sunday night....