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Erdem Başçı

TURKEY - Economy

Balancing Act

Governor, Central Bank of the Republic of Turkey


Born in 1966, Erdem Başçı obtained his PhD in Economics from Bilkent University in 1995, and between 1995 and 2003 worked as an assistant professor. He also lectured at the University of York as an honorary visiting fellow in 1999, and his academic papers have been published in the Oxford Economic Papers, the Journal of Banking and Finance, the Journal of Economic Dynamics and Control, and the Journal of Mathematical Economics. Having served as Deputy Governor of the Central Bank of the Republic of Turkey since October 9, 2003, he was appointed Governor on April 19, 2011.

"Our medium-term outlook comprises of sustainable growth that creates employment while preserving price and financial stability."

How would you assess the resilience of the Turkish banking sector?

Thanks to solid capital cushions, lack of exposure to toxic assets, prudent regulatory oversight, and a flexible liquidity management framework, the banking sector was able to support the rapid recovery in the aftermath of the Lehman Brothers’ crisis. Lately, as the worries surrounding European banks regarding the tightening strains on funding and capital adequacy escalated, Turkish banks remain relatively safe from these concerns. Despite having close financial connections with the European banking sector, the Turkish banks could comfortably roll over their external debt in excess of 100%. Turkish banks enjoy a large domestic market, rapid population growth, and low penetration, providing reasonable growth prospects. In addition, the new policy mix implemented by the Central Bank of the Republic of Turkey (CBRT) led to the longer maturity of banking system liabilities and supported financial stability via tools used to restrain excessive credit growth. These prudent policies will serve as a buffer in the face of rapidly changing global market conditions.

“Our medium-term outlook comprises of sustainable growth that creates employment while preserving price and financial stability.”

How would you assess the country’s foreign currency position compared to its short-term debt?

In Turkey, households have a long FX position due to the fact FX loans to households are not allowed, while FX deposits are permitted. Considering firms, balance sheets indicate open positions. Nevertheless, this is stock data. The flow of FX revenues should also be taken into account since many of these companies are exporters and FX earners, providing them with a natural hedge. The main risk factor in many countries is the FX debt of households and consumers, which is negligible in Turkey.

What is your view of the current strength of the lira following significant depreciation in the latter half of 2011, and what steps is the CBRT taking to mitigate excessive exchange rate volatility?

The depreciation in the Turkish lira observed until August 2011 was initiated by the new policy mix of low short-term rates and high reserve requirements. This has contributed significantly to our export competitiveness, the rebalancing of the economy, and the normalization of the current account deficit. Following escalating concerns over financial strains in Europe around August 2011, international investors have resorted to the safe haven of US-dollar assets. This trend led to a rapid depreciation in all emerging market currencies and a further undesired depreciation of the Turkish lira. The policy measures taken by the CBRT since August have alleviated the adverse effects of global fluctuations on the Turkish economy, which emerged in parallel to uncertainties in the European economy. The CBRT’s measures regarding foreign exchange liquidity and decisions related to hikes in the interest rate corridor in August and October reduced the extent of volatility in the exchange rate compared to that of other emerging market economies.

Turkey’s current account deficit is a noted concern for foreign investors. Can the deficit be reasonably reduced and sustained at a level to moderate these concerns?

The outcome of the policy measures that we have taken so far is becoming more visible, as can be seen through recent data releases. The rebalancing between domestic and external demand is ongoing as envisaged. Final domestic demand is decelerating and the contribution of net external demand to growth is increasing. Accordingly, the rebalancing process and an improvement in the current account deficit is expected to continue in the coming months.

Foreign investors around the world are apprehensive about the possibility of a new financial crisis in the international market. How do you reassure them that Turkey is a secure place for investment?

Solid fundamentals, robust growth, and prudent macroeconomic and financial sector policies could be the key for a successful de-coupling of emerging market economies in 2012. For the Turkish economy in particular, we think the 4% growth of the “Medium Term Plan” for this year is achievable thanks to the success of our exporters in improved market diversification and enhanced competitiveness provided by the exchange rate, despite the downside risks due to the negative outlook for the EU. Considering the monetary policy measures taken to bring inflation back to its 5% target, the rebalancing of external and domestic demand, a robust financial system, and prudent policies of the policy makers, Turkey will continue to perform well in 2012 as well.

What are your monetary policy priorities looking forward?

Policies implemented by the CBRT since the last quarter of 2010 have mitigated macro financial risks and contributed to the rebalancing of the economy. Still, the intensification of the financial turmoil in August 2011 led to excessive volatility in emerging market currencies and created inflationary pressures despite a global slowdown. In order to prevent the worsening of the price setting behavior due to surging inflation, the CBRT has delivered strong monetary tightening since October 2011. Accordingly, the interest rate corridor was widened upward and the cost of funding provided to the market was raised significantly. Moreover, with the aim of minimizing the adverse effects of abrupt changes in capital flows due to uncertainties regarding the global economic outlook, a flexible liquidity management strategy was designed and implemented. These measures limited the excessive depreciation of the Turkish lira while containing inflation expectations. Monetary policy will continue to focus on price stability while preserving financial stability as a supplementary objective. The CBRT will do its best to mitigate the adverse effects of volatility in capital flows. However, it should be underscored that continuous coordination among monetary, fiscal, and financial sector policies is crucial, especially within such a challenging global backdrop. For the medium and longer term, strengthening structural reforms aimed at reducing the savings deficit would boost the resilience of the economy and reinforce sustainable growth.

What is your outlook for the Turkish economy in the medium term?

Our medium-term outlook comprises of sustainable and healthy growth that creates employment while preserving price and financial stability. Strengthening the structural reform agenda would ensure the sustainability of fiscal discipline and reduce the savings deficit to support the relative improvement of Turkey’s sovereign risk, and thus facilitate price stability and financial stability in the medium term. This will also provide more flexibility for monetary policy and contribute to social welfare by reducing the risk premium on government securities further. In this respect, steps toward the implementation of structural reforms envisaged by the Medium Term Program remain of utmost importance.

© The Business Year – April 2012



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