Required reserve ratio policy might “throw a curve”
28 March 2013
If the motivation for the latest MCP decision was proper, so was the decision not to raise reserve requirements. I openly stated on Tuesday my expectation about the Central Bank (CB) Monetary Policy Committee (MPC) decision. I expected that the MPC will moderately increase reserve requirements in the case that the recent developments are read as the start of a new episode of growth and will keep the reserve requirements constant otherwise. I didn’t anticipate any cut in the interest rate corridor or the policy rate. The MPC did not change the reserve requirements, but lowered the upper bound of the interest rate corridor by one percentage points.
It is dubious whether recovery has started
23 March 2013
There isn’t yet any strong sign of moderate economic recovery having started in the first quarter I will make a pause on the series about the widening gap between Turkey’s FX liabilities and revenues as March figures for two important indicators were released yesterday: capacity utilization ratio (CUR) and real sector confidence index. Changes in CUR give insights about the changes in industrial output and thus growth performance. And changes in real sector confidence index help us understand the trends in private investments.
The constraints FX open position imposes
21 March 2013
Due to the FX open position of the economy, rapid increases in exchange rate would disrupt balance sheets and hence lower growth. I will continue with the challenges facing economies that have higher FX liabilities compared to FX debt. This economic disease restricts policy options. For instance, assume that the central bank implements an anti-inflationary policy together with measures that regard the real value of domestic currency in order to maintain the international competitiveness of the economy.
A hard-to-cure disease
19 March 2013
High FX open position is an economic disease: the economy is indebted in FX terms. During the last two pieces, I focused on the challenges facing economies whose FX debt is higher than FX assets (that is economies with high FX open position). The latest piece was about the positive and negative effects of real depreciation of the domestic currency, that is, a rise in the exchange rate beyond the difference between domestic and foreign inflation rate. The last one of these is quite interesting as it gives way to a self-feeding upwards pressure on FX open position: domestic currency being valued, especially for a long timeframe, encourages FX borrowings, which in the end increases the FX open position of the economy.
16 March 2013
In the case of turmoil in international financial markets, economies with high FX open position are affected at the highest degree Last time I argued that real depreciation of the domestic currency, that is, a rise in the exchange rate beyond the difference between domestic and foreign inflation rate, would be detrimental for the level of economic activity. The main feature of such economies is that they have higher FX debt compared to FX receivables. Of course, certain sectors might have higher FX assets than FX liabilities. Exporter companies are in this group, for instance. What matters for the entire economy, however, is the FX liability to asset ratio in the aggregate balance sheet of all sectors. I will call this the FX open position. This is the case for Turkey’s corporate sector to
The inability to become normal
14 March 2013
Factors that trigger exchange rate hikes will inevitably affect the economic growth and unemployment rate adversely. The rise in the exchange rate beyond the CPI inflation, that is, the depreciation of the lira in real terms, evidently has a positive effect on exports, unless other elements offset this gain. In the final analysis, growth rate and the real value of domestic currency are closely related where growth rises as the real value of the domestic currency decreases.
12 March 2013
Budget deficit is one of the most dangerous indicators. The year-end estimation for 2012 is 10 percent of GDP. I was at the nineteenth annual conference of the Economic Research Forum based in Cairo. This year’s conference was held at Kuwait on 3-5 March. The main theme was “Economic Development and the Rise of Islamist Parties.” Hussein El Kazzaz, economic advisor to Egypt’s president Mohammed Morsi was one of the speakers at the third day’s plenary session. Kazzaz used to be in the academia.
First signs of recovery in industrial production
09 March 2013
4 percent growth rate target is still achievable. In addition, industrial output figures for January imply that a mild recovery has started. The Turkish Statistical Institute, TURKSTAT, has updated the industrial output index and released a completely new series with base year 2010=100. I am using working day adjusted figures. Annual industrial output growth decreased constantly between the first quarters of 2011 and 2012, floated around low levels until the fourth quarter and decreased further until the end of the year. Here are the figures (please note that all indicate year-on-year growth):
What are the Central Bank’s options?
07 March 2013
With credit growth rate being substantially above the targeted level, the MPC will continue increasing reserve requirements. The Central Bank (CB) targets three variables. Out of these, two are released on a monthly basis and one on a weekly basis. Consumer price index (CPI) inflation and real exchange rate figures for February were released this week. Also, credit figures for the week that ended on February 22nd are available. On the 26th, the press release on the summary of the Monetary Policy Committee’s (MPC) February meeting was issued. I would like to assess the recent developments with reference to the press release in order to identify the options ahead of the CB.
Inflationary dynamics have not changed
05 March 2013
If the Central Bank intervenes to lower lira’s value as was done in the late 2010 and early 2011, inflation will increase. The same old scene has been playing in consumer price index (CPI) and headline inflation for some time now. In spite of temporary ups and downs in the indices, trends vanish when you extent the analysis over a longer timeframe. Rather they are replaced by floating movements around an average value. Figures for February demonstrate a similar tendency: year-end CPI inflation had a value of 7 percent, higher than December’s 6.2 percent and lower than January’s 7.3 percent. The average that CPI inflation figures have been floating around since 2009 is 7.5 percent.