Monday, March 28, 2011

Weekly Hurriyet Column: The (hi)King’s Speech

Below is my Hurriyet Daily News & Economic Review column for this week, which you can also read at the Daily News website.  As for the title, you know I love cheesy titles, but I think I might have hit a new high (or low, depending on how you see it) with this one. A friend and reader had the following to say: "The (hi)King’s Speech??!! oh man this is just too much :)", to which I answered: "I know... I am one cheesy bastard, aren't I?:)"

I almost don't touch upon at all whether the reserve hikes will work or not, or what they mean, but that's what the addendum is for... I should have it over at the blog in the next 24 hours... And so on to the column:

If you were to believe the papers and analyst reports, the Central Bank of Turkey’s, or CBT’s, required reserve ratio, or RRR, hikes at last Wednesday’s rate-setting meeting were a complete surprise.

That may as well be the case, but it would reflect markets’ herd behavior more than anything else. For some reason, markets took CBT Governor Durmuş Yılmaz’s March 15 speech to, or rather interview with, the Wall Street Journal as irrefutable evidence that the Bank would stay on hold this month.

It is true that the Governor had noted that the Bank would “wait until the end of the month to assess whether its policy aimed at deterring hot money flows was working.” But those remarks refer to the policy rate part of the Bank’s two-pronged strategy, and the Bank did not change its one-week repo rate at last week’s meeting.

As for whether the RRR hikes were successful in taming credit growth, Yılmaz highlighted that “economists [would] need to wait until at least the end of March to judge whether his policy was working, because much of the impact from the increased reserve requirements had yet to feed through.”

The WSJ took all this, correctly I might add, to mean that the policy rate would be left on hold, but that RRRs could be increased again. So it seems that something was lost in translation. Moreover, at the one-pager after the previous meeting, the CBT was saying it would “monitor the tightening impact of the implemented policy mix until the next meeting, and take additional measures along the same line, if needed.”

In the same WSJ interview, the Governor also clarified the mysterious $10 billion of hot money that had left Turkey according to the Bank. Economists had been complaining that they could not find data to support the CBT’s claim, which I had found very odd: The numbers add up once you add banks’ off-balance sheet positions, which are mainly swaps, to the regular capital flows.

Interestingly enough, all the statistics, which were summarized in a short note by the CBT right before the Yılmaz interview was published, are in the Bank’s weekly press bulletin. I would argue that the off-balance sheet items should not be a measure of the effectiveness of the CBT’s goal of taming the current account deficit, as they are not directly linked to the deficit, but the numbers were always there.

In fact, it is the least-quoted part of the Governor’s interview that disturbed me most. Answering a question on fiscal policy, Yılmaz responded that he had asked the government to use the increase in tax revenues to pay down debt, and that the government had complied. While revenues were 17 billion Turkish Liras over the original target last year, the primary surplus was only 2 billion liras higher than planned. This hardly seems like “paying down debt.”

To sum up, I have been more critical than many on the Central Bank’s unconventional monetary policy mix. And while 4 percentage points seems like a big increase in RRRs, I don’t think it will be effective in curbing credit significantly: After all, it is more or less equivalent to a 25 to 50 basis points hike in the policy rate. I am also extremely dissatisfied, like the folks on 19th Street N.W. in D.C., with the Bank’s complacency regarding fiscal policy.

But I did not find any part of the Governor’s interview that could be misleading on the direction of monetary policy. Economists and markets have fooled themselves and are now blaming the Central Bank. As Yanks would say, a good listener would only need half a word, but even drums and clarions would not be sufficient for a bad listener, as a well-known Turkish proverb goes.

It seems that for some folks following the Turkish economy, the CBT needs to call on the whole orchestra.

Emre Deliveli is a freelance consultant and columnist for Hürriyet Daily News & Economic Review and Forbes as well as a contributor to Roubini Global Economics. Read his economics blog at


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