Tag: Erdem Basci

  • Turkey’s New Year’s Gift: Record Low Borrowing Costs

    Turkey’s New Year’s Gift: Record Low Borrowing Costs

    By Emre Peker and Yeliz Candemir

    ISTANBUL—Turkey is enjoying quite a turnaround. Exactly a year ago, economists questioned Governor Erdem Basci’s unorthodox policies and the central bank was forced to more than double interest rates to 12% in an effort to prop up Turkey’s plunging currency and to fight double-digit inflation.

    Now, the $800 billion Turkish economy’s rebalancing in the past year has secured not only an investment-grade status from Fitch Ratings in November but also the “Central Bank Governor Of The Year” award for Mr. Basci from The Banker, a financial publication, helping to feed an already fiery surge in investor confidence.

    The proof: a $1.5-billion 10-year bond sale on Tuesday at an all-time low yield of 3.473% amid overwhelming demand. That compares with a similar issuance in January 2011, when Ankara paid 6.35% to investors. What’s more, the Treasury’s lira-bond sales this week were 25 times oversubscribed, helping cut yields on the benchmark two-year debt to 5.96% on Wednesday.

    “These sales show the positive outlook on Turkey. Economic stability and improvement in all the indicators in Turkey at such a turbulent time in global markets is increasing confidence in the central bank and the country,” said Cem Tozge of Ata Asset Management in Istanbul.

    Turkey’s lure for investors is underpinned by improving fundamentals. Inflation slowed to 6.2% in December from a 3.5-year high of 11.1% in April; the current-account deficit narrowed to 6.5% of gross domestic product in October from 10% a year earlier; and 2013 economic growth is expected at more than 3.5% that’s set to outpace other emerging market peers such as Mexico, Poland and South Africa, according to International Monetary Fund forecasts.

    To be sure, it wasn’t a slam dunk for Turkey and Mr. Basci.

    When the governor initiated his unorthodox policy in October 2011, most economists accused the central bank of obscuring its monetary stance.

    By January of last year, Tim Ash, Standard Bank Plc’s head of emerging market research who was then a chief economist at Royal Bank of Scotland Group Plc, RBS.LN +1.97% quipped: “The market is increasingly confused by the central bank’s policy strategy; it’s either going to win them a Nobel Prize or it’s a road to nowhere.”

    Yet despite its complexity, it did neither.

    “The result [of Mr. Basci’s policies], at least so far, is a soft landing for Turkey rather than the boom-and-bust scenario that was threatening to unfold,” The Banker said in awarding the central bank governor with its annual award.

    But the mechanisms didn’t get any simpler. The central bank still uses an interest rate corridor where funding costs are set daily between 5% and 9%, manages market liquidity, shifts reserve requirements, and simultaneously targets the exchange rate, inflation and financial stability.

    What’s more, Turkey’s success in the bond markets is not all of its own making: low interest rates around the world have left investors clamoring for places to park cash, leading to blowout bond deals of late for borrowers such as Mexico and even Mongolia.

    Still, the country’s debt rating helps. Moody’s Investors Service is widely expected to award Turkey with a second investment-grade rating this year, which would unleash a flood of cash from foreign investors as the Treasury plans to raise about $8 billion in international debt markets.

    “Because of the second-rating upgrade anticipation, interest rates will generally be on a downward trend,” said Ugur Kucuk, a fixed income strategist at Is Investment in Istanbul.

    That’s good news for the Treasury, which recorded a 25 billion lira ($14 billion) deficit in 2012, compared with a 15.2 billion lira shortfall in 2011. The biggest gap since 2010 indicates that the government’s fiscal performance weakened amid Turkey’s economic rebalancing, where declining consumer spending sapped the state from tax revenues.

    “I don’t think it’s an alarming situation as the government may make up for the widening deficit in 2012 by increasing revenues from privatizations this year,” Mr. Kucuk said. Then, pointing to demand for Turkish debt in international markets, he added, “Or the Treasury can just borrow more through bond sales.”

    Erdem Basci,

    monetary policy,

    Turkey

    via Turkey’s New Year’s Gift: Record Low Borrowing Costs – Emerging Europe Real Time – WSJ.

  • Erdogan’s War on ‘Interest-Rate Lobby’ Puzzles Economists

    Erdogan’s War on ‘Interest-Rate Lobby’ Puzzles Economists

    By JOE PARKINSON

    ISTANBUL—Economists expressed dismay Wednesday at a pledge from Prime Minister Recep Tayyip Erdogan to strike back at an “interest-rate lobby” that allegedly seeks to stifle Turkish growth.

    In comments late Tuesday, the Turkish leader also said market interest rates should be lower. High interest rates, he said, cause inflation—contrary to orthodox economic theory accepted around the globe.

    “We will make the necessary sharp responses against the interest-rate lobby. We won’t let the interest-rate lobby work in comfort,” he told reporters in Ankara.

    The Turkish leader hasn’t publicly outlined who he believes constitutes this lobby. But he is commonly understood to be referring to foreign parties—including investors, economists and journalists—who have called for a hike in Turkey’s benchmark policy rate in order to tame inflation and cool an overheating economy. Government ministers have suggested the call for higher rates comes from those who want to park their money in Turkey and “suck Turkey’s blood.”

    Mr. Erdogan didn’t spell out a response or say who would mount it.

    His intervention comes as economists covering Turkey say they are struggling to understand the country’s monetary policy, which they fear could drive its economy, which grew 8.2% in the third quarter of 2011, towards a hard landing and even recession later this year.

    The stakes are high. The government’s electoral success and increased international clout are based largely on growing prosperity, successes that a sudden downturn could damage. Turkey, which conducts roughly half its trade with the European Union, has also been a rare bright spot among European economies.

    “Markets find these comments a little disturbing…There’s absolutely no evidence of a speculative attack on the lira, or some foreign markets plot against Turkey,” said Tim Ash, chief emerging markets economist at RBS in London. “Worse, it comes as the market is increasingly confused by the central bank’s policy strategy; it’s either going to win them a Nobel Prize or it’s a road to nowhere.”

    At issue, as inflation has risen above 10% for the first time in three years, is the central bank’s reluctance to raise its main policy rate. That benchmark overnight rate controls lending for all institutions, and now stands at 5.75 percent. Instead, the bank has employed a wider interest-rate corridor—a rate that it says will vary between 5.75% and 12.5%—that it can change daily, enabling it to tighten and loosen policy according to market conditions.

    Turkish ministers have called for the policy rate to be equal to the rate of inflation—for a 0% real interest rate. In May, Mr. Erdogan said Turkey should have real interest rates at zero, prompting some economists to speculate the central bank has been keeping its policy rate artificially low to accommodate that goal.

    The central bank didn’t respond to calls to comment on Mr. Erdogan’s speech.

    Confusion over the central bank’s intentions, as well as imbalances in Turkey’s current account, have contributed to a rapid fall in the value of the Turkish lira. The central bank has attempted to stem that fall by spending scarce foreign reserves in currency-exchange market operations. The bank says it has spent has spent some $4.5 billion in the last week of December, bringing its reserves to $78.3 billion.

    “However cruelly the interest-rate lobby works, the spending power of citizens of this country who consume declines by the same amount,” Mr. Erdogan said. Market interest rates should fall to the 5.75 percent policy rate, he said.

    Lenders such as Garanti Bankasi AS are now charging Turkish borrowers as much as 20 percent annually for loans, up from a little over 10 percent a year ago, crimping consumers’ ability to borrow.

    In a year when the government hopes to adopt a new constitution, likely in a referendum, any shadow over Turkey’s economy could pose a direct political threat to the government. Analysts say that could explain Mr. Erdogan’s finger-pointing at an alleged interest-rate lobby.

    A spokesperson for the prime minister declined to comment. The government has been widely praised for implementing economic reforms that generated consistent high growth in recent years. The central bank also has supporters among Turkish economists for its unorthodox policies.

    Markets shrugged off Mr. Erdogan’s comments early Wednesday, with Turkish assets rising on news that the economy’s bloated current-account deficit in November narrowed for the first time in more than two years. That finance gap, which now tops 10% of gross domestic product and is mostly funded by volatile short-term portfolio investments, is cited by investors as a key weakness for the Turkish economy.

    What Mr. Erdogan says on interest rates shouldn’t matter, as Turkey’s central bank is legally independent, with a mandate to fight inflation and insuring financial stability. Speculation over the bank’s independence has risen since April, however, when the position of bank governor was filled by Erdem Basci, a childhood friend of Turkish economic czar Ali Babacan, a deputy prime minister.

    The central bank has defended the economic logic of its decisions, stressing that policy has tightened significantly in recent months and that an unorthodox response—including keeping benchmark rates low, opening the flexible rate corridor and hiking banks’ reserve requirements to tame a gathering lending boom—was required to curb surging domestic demand and shore up the Turkish lira, which weakened some 20 percent against the dollar last year.

    Mr. Basci last week hailed Turkey’s monetary policy as “the world’s most creative,” and forecast that the lira would be one world’s fastest-appreciating currencies in 2012. “Those who invest in the lira will gain in 2012,” he said. “As you sip your coffee, the Turkish lira will appreciate.”

    Write to Joe Parkinson at joe.parkinson@dowjones.com

    https://www.wsj.com/articles/SB10001424052970204124204577154353478071244

  • PROFILE-Turkey’s Central Bank Governor Erdem Basci

    PROFILE-Turkey’s Central Bank Governor Erdem Basci

    Position: Governor of Central Bank of Turkey

    Incumbent: Erdem Basci

    Date of Birth: Aug. 9, 1966

    Term: April 2011 to April 2016.

    erdem basci

    Key Facts:

    — As deputy central bank governor for the last eight years, Basci has been at the heart of Turkey’s transformation from an economic basket case to a stable, fast-growing economy.

    — The respected former academic, who has taught in Turkey and Britain, is the architect of the bank’s unorthodox and widely criticised strategy of countering a worryingly high current account deficit through a policy mix of lower interest rates and higher required reserve ratios.

    — Basci, 45, is a contemporary of Economy Minister Ali Babacan. Both their fathers ran businesses in Ulus, the traditional heart of Turkey’s capital Ankara, and he served as an aide to the minister before joining the bank.

    — Basci’s wife wears the Islamic headscarf, reason enough in 2006 for the country’s then-president, staunchly-secular Ahmet Necdet Sezer, to veto him as governor on ideological grounds.

    — Having inherited record low inflation levels, with consumer price inflation standing at 4.26 percent in April, Basci is now running a Turkish economy that will show close to double-digit inflation for 2011, with a lira currency that has depreciated by around 20 percent.

    — To contain inflationary pressures and help protect the lira, the central bank shifted to another controversial strategy in late October by using the overnight rate corridor to tighten liquidity, while leaving the policy rate, the one week repo rate, at a record low 5.75 percent. Bankers feel the new methods create uncertainty and would prefer the policy rate to be used as the main monetary tool.

    — The economy is expected to have grown by 7 percent in 2011, slowing from 9 percent in 2010. But, due in large measure to the euro zone’s debt problems, there are concerns that Turkey could face a hard landing in 2012 at a time when the bank should be reining in inflation, making Basci’s job that much trickier.

    via PROFILE-Turkey’s Central Bank Governor Erdem Basci | Reuters.