wall street journal
ECONOMY
NOVEMBER 12, 2010, 12:07 P.M. ET
NOVEMBER 12, 2010, 12:07 P.M. ET
By MARC CHAMPION
Turkey's central bank on Friday landed the second blow in a one-two punch designed to shoo-away hot money and damp a credit boom, as it raised the Turkish lira reserve requirement just a day after it slashed overnight-borrowing rates.
The bank said it was raising the reserve requirement by half a percentage point to 6% in an effort to soak up excess liquidity as the bank gradually withdraws stimulus measures taken during last year's downturn. The measure will extract 2.1 billion lira from the economy, the central bank said in its statement.
On Thursday evening, the bank cut its overnight-borrowing rate to 1.75% from 5.75% as it tried to discourage investors from parking money overnight to take advantage of much higher interest rates than those available in developed economies. The bank kept its main lending rate unchanged at 7%.
The Istanbul Stock Exchange closed slightly down, off 0.76%, while the Turkish lira closed at 1.4280, having weakened to as much as 1.4415 during the day. It had closed on Thursday at 1.4230.
Like other emerging markets, Turkey finds itself in a squeeze that has only been exacerbated by the U.S. Federal Reserve's decision to pump more liquidity into the market. As investors look for better returns, countries such as Turkey find themselves forced to decide between allowing their currencies to appreciate, making their exports less competitive, or cutting interest rates and risk fueling inflation.
"If you look at the amount that foreign investors have been offering to sell the central bank [of Turkey] every morning for the last two weeks, it's around $600 million. That's a pretty good indicator of how much hot money is coming in," said Atillah Yesilada, an Istanbul-based economist at Global Source, an economic consultancy.
The effect of that money injected into the economy has been to bring down real-effective interest rates for Turkish borrowers and at the same time raise the deposit base of banks so that they can increase the quantity of credit available to finance Turkey's consumer boom, Mr. Yesilada said. Turkey's main automobile association predicted this week that the country could hit a record for car sales this year.
The credit boom is sucking imports into the economy and exacerbating Turkey's current account deficit, expected to reach around 5% of gross domestic product this year. That's a potential vulnerability for Turkey's economy that keeps ratings agencies from giving Turkish sovereign debt an investment-grade rating.
The current-account deficit wouldn't be so worrying if it was being financed by foreign-direct investment or longer-term lending, but 75% of Turkey's current-account deficit is financed by lending that has a maturity term of one year or less, said Mr. Yesilada. "This money can pull out at any time," creating a serious shock to the economy, he added.
There was some skepticism among analysts as to whether the central bank's maneuvers would be successful in deterring hot money flows. The move could either trigger foreign investors to buy short-term Turkish government bonds, or leave for other markets, Citigroup said in a research note. "Since the former is probably more likely, given the current state of global liquidity conditions, the effectiveness of the bank's bold move is questionable," Citibank said.
Write to Marc Champion at marc.champion@wsj.com
Turkey's central bank on Friday landed the second blow in a one-two punch designed to shoo-away hot money and damp a credit boom, as it raised the Turkish lira reserve requirement just a day after it slashed overnight-borrowing rates.
The bank said it was raising the reserve requirement by half a percentage point to 6% in an effort to soak up excess liquidity as the bank gradually withdraws stimulus measures taken during last year's downturn. The measure will extract 2.1 billion lira from the economy, the central bank said in its statement.
On Thursday evening, the bank cut its overnight-borrowing rate to 1.75% from 5.75% as it tried to discourage investors from parking money overnight to take advantage of much higher interest rates than those available in developed economies. The bank kept its main lending rate unchanged at 7%.
The Istanbul Stock Exchange closed slightly down, off 0.76%, while the Turkish lira closed at 1.4280, having weakened to as much as 1.4415 during the day. It had closed on Thursday at 1.4230.
Like other emerging markets, Turkey finds itself in a squeeze that has only been exacerbated by the U.S. Federal Reserve's decision to pump more liquidity into the market. As investors look for better returns, countries such as Turkey find themselves forced to decide between allowing their currencies to appreciate, making their exports less competitive, or cutting interest rates and risk fueling inflation.
"If you look at the amount that foreign investors have been offering to sell the central bank [of Turkey] every morning for the last two weeks, it's around $600 million. That's a pretty good indicator of how much hot money is coming in," said Atillah Yesilada, an Istanbul-based economist at Global Source, an economic consultancy.
The effect of that money injected into the economy has been to bring down real-effective interest rates for Turkish borrowers and at the same time raise the deposit base of banks so that they can increase the quantity of credit available to finance Turkey's consumer boom, Mr. Yesilada said. Turkey's main automobile association predicted this week that the country could hit a record for car sales this year.
The credit boom is sucking imports into the economy and exacerbating Turkey's current account deficit, expected to reach around 5% of gross domestic product this year. That's a potential vulnerability for Turkey's economy that keeps ratings agencies from giving Turkish sovereign debt an investment-grade rating.
The current-account deficit wouldn't be so worrying if it was being financed by foreign-direct investment or longer-term lending, but 75% of Turkey's current-account deficit is financed by lending that has a maturity term of one year or less, said Mr. Yesilada. "This money can pull out at any time," creating a serious shock to the economy, he added.
There was some skepticism among analysts as to whether the central bank's maneuvers would be successful in deterring hot money flows. The move could either trigger foreign investors to buy short-term Turkish government bonds, or leave for other markets, Citigroup said in a research note. "Since the former is probably more likely, given the current state of global liquidity conditions, the effectiveness of the bank's bold move is questionable," Citibank said.
Write to Marc Champion at marc.champion@wsj.com
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