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    Monetary policy and the brown pill

    Fatih Özatay, PhD07 May 2013 - Okunma Sayısı: 963

    Not only does the savings rate go downhill; international comparisons validate the underperformance.

    While we were almost convinced that everything was fine, I am afraid that new risks for the future are piling up. First is the high possibility of having deposit rates below inflation while domestic savings rate has been crashing down. Second is about the reserve options mechanism, ROM, which allows banks to keep reserve requirements in FX. I think there is a similar mentality underlying the ROM and the latest airport tender being carried out in Euro terms. Though the two might seem to be irrelevant at first glance, both aim to encourage people to keep and borrow FX rather than lira. Moreover, the mechanism is self-fulfilling: the incentive requisites such actions.

    What Turkey most feared since the late 2010 was current account deficit reaching record-high levels. In order to ease down the deficit, Turkey settled with a moderate growth at 2.2 percent in 2012. Current account deficit can be defined in different ways. It is the difference between the exports and imports of goods and services. At the same time, it is the difference between domestic investments and domestic savings. Keeping investments constant; lower the savings higher the current account deficit will be. Or “keeping investments constant; higher the consumption level, higher the current account deficit will be.”

    Savings rate going downhill

    Domestic savings rate to GDP ratio was 21.6 percent on average in the 1990-99 period. In 2000-2009 period, the rate declined to 15.8 percent. 2010-2102 average was 13.5 percent. Turkey’s savings rate has been going downhill. The Medium Term Program aims to achieve 15 percent by the end of 2013. Not only does the savings rate go downhill; international comparisons validate underperformance. In 2012, despite Turkey’s 14.3 percent, savings rate to GDP rates were 27 percent in Russia, 31 percent in Korea, and 32 percent in India. Latin American countries generally suffer from low savings rates. But Brazil’s savings to GDP ratio was 17.6 percent, remarkably higher than Turkey’s 14.3. Low savings rate is one of the key challenges addressed by the Medium Term Program and steps have been taken to solve the problem, including the new private pension system and life insurance. The Medium Term Program puts a special emphasis on the mentioned mechanisms. Evidently, the economic management is aware of and endeavoring to overcome this key vulnerability. Nevertheless, interest rate outlook counteract these efforts. The rate currently floats within the 6-7.5 percent interval. Treasury bond rates are even lower. Yet, the inflation estimate for the next year is close to the current level.

    Generous liquidity injections and extremely low interest rates in developed countries constitute a critical problem for emerging markets as they encourage abundant short-term capital inflows towards the latter. The efforts to lower short-term inflows which are prone to escape are understandable given the risks caused both by the inflow and the outflow of international funds. This is also why interest rates decrease while inflation does not. Yet, these attempts aggravate the problem they intend to solve in the first place: lowering savings rate increases Turkey’s dependence on foreign capital inflows. The sanitarian of my boarding school, Necati Ağa, aka Necati the Vet, used to give everyone with fever a brown bill. I hope Turkey’s monetary policy does not become like that brown pill. Attempts to solve all problems at once might end up aggravating the problems.

    This commentary was published in Radikal daily on 07.05.2013

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