TBY talks to Erdem Başçı, Governor of the Central Bank of the Republic of Turkey, on the Turkish banking sector, monetary policy, and exchange rates.
TBY How would you assess the resilience of the Turkish banking sector?
ERDEM BAŞÇI 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 crisis. Lately, as the worries surrounding European banks regarding the tightening strains on funding and capital adequacy escalate, Turkish banks remain relatively safe from these concerns. Despite having close financial connections with the European banking sector, 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.
What steps is the CBRT taking to mitigate excessive exchange rate volatility?
The depreciation of 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 on financial strains in Europe around August 2011, international investors 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 the 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 through improved market diversification and enhanced competitiveness provided by the exchange rates. 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, Turkey will continue to perform well in 2012.
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.
© The Business Year