Friday, February 11, 2011
I have been burning a lot of brain cells of late on whether the CBT's brave new policy mix has been successful. While passing judgment based on data is not straightforward, the other domestic and global events make it difficult to attribute this success to the Bank's policies alone. It is therefore better to address the question in two steps:
Do Turkey data defy the doubters?
Emma Saunders of the FT's moneysupply blog thinks so. By looking at the most recent deposit and credit data, she concludes that deposits are lengthening in maturity and credit is slowing down.
With deposits, she is right that there is slow tendency towards longer-maturities, but that is nowhere near the levels the Bank would like. With credit, I am less confident: While Emma highlights a week where credit fell sharply, credit data is notoriously volatile.If you look at moving averages of the weekly credit growth, you don't see definite proof of a slowdown, just some moves in the right direction:
Besides, it is way too early to pass any judgment on whether the CBT is achieving the desired effect in deposits and credit: The latest reserve hikes won't be in effect for a week or so, and even then you need time for the effect to work its way into prices at first (i.e. deposit and lending rates) and then quantities (deposit maturities, and loans). So I would say that we just have to wait and see:
You could of course argue that, at least from capital flows and recent bout of weakness of Turkish assets, the Bank's policies are working. Again, a picture is worth more than a thousand words, so I have three thousand words of material:
First, foreigners' stock holdings, from Central Registry Agency:
Then, non-resident bond holdings:
And finally Turkish asset prices:
So there are some results, at least in terms of slowing down hot money and weakening the lira, despite lack of complete evidence that credit is slowing down. Therefore, while we could not say that Turkey data defy the doubters, they do not defy the believers, either.
But the question is to whom the results should be attributed to, to which I turn to now:
If we deem the Bank successful on the capital flows and asset fronts, it is not given that the success is solely due to the Bank's policies. It is important to note that this is a time when for several reasons, ranging from the reemergence of emerging country risk thanks to the events in Tunisia & Egypt to perception of saturation in EMs and the rising US 10-year Treasuries. It is very difficult, if not impossible, to separate these different effects.
But even if you could attribute some of the movement in Turkish hot money and asset prices to the Central Bank's policy, say by controlling for EM flow data from EPFR (see picture below, from an excellent presentation by Nomura) or EM market performance, it is still not clear how exactly the Central Bank policies are working their magic.
For one thing, after all the columns I have been reading, both in the domestic and foreign press on CBT policy, as well as my own chats with foreign journalists and meditation/brainstorming, I have convinced myself that a significant part of the CBT's success is emanating from what I described as constructive ambiguity in my last Hurriyet Daily News & Economic Review column: Markets got confused on what the CBT was achieving. This uncertainty on the direction of monetary policy, in turn, seems to have scared quite a bit of hot money away.
To illustrate this point, two well-known economics columnists were more or less making he opposite points on Turkish monetary policy in their columns in Turkish daily Radikal on the opposite pages early this week. If economists following the Turkish economy can't agree, it'd be natural to expect some confusion in markets as well...