Loan Growth: Tough Challenge for Turkey’s New Central Bank Governor

Erdem Başçı’s appointment to head the Turkish Central Bank comes as no surprise for the markets, as he is known as the brains behind the recent ‘unorthodox’ policy stance. The bank is keeping its main interest rate at record low level to deter ‘hot money’ from flowing into Turkey, while raising reserve requirements for lenders to curb loan growth and rein in a gaping current account deficit.

The Turkish government’s selection of Erdem Başçı, 44, as the new Central Bank chief came as no surprise to the markets. He is known as the brains behind the bank’s unorthodox policy stance, which aims to curb loan growth and cool down rapid economic growth.

Some analysts have voiced concerns, however, that the appointment of Başçı, an old friend of Deputy Prime Minister Ali Babacan, will bring the Central Bank “too close” to the government.

Başçı’s appointment was approved by President Abdullah Gül late Thursday and became official with the publishing of the government decree in the Official Gazette on Friday.

Gov. Başçı will chair his first monetary policy meeting April 21.

The appointment “implies policy continuity at the Central Bank and will be welcomed by [the markets],” Bloomberg quoted Ahmet Akarlı, the London-based economist for Goldman Sachs, as saying in a note to investors. “Başçı played a key role in shaping the bank’s policies over the past few years.”

Başçı has worked at the Central Bank since 2003. It was his paper, published on the bank’s website Dec. 11, that outlined the latest policy of low interest rates and higher reserve requirements.

Appointing Başçı is “good for the predictability of the policy stance, good for accountability for prior actions,” Tevfik Aksoy, the London-based head of emerging market economics for the region at Morgan Stanley, told Bloomberg.

The bank’s main tasks this year will be to narrow the current-account deficit and pare loan growth, Başçı said March 29. The deficit more than doubled in February from a year earlier, widening to $6.1 billion.

No progress in sight

The Turkish Central Bank has cut interest rates by 0.75 percent to 6.25 percent since December to help slow capital inflows while increasing reserve requirements to cap growth in loans. Since then, many emerging economies have raised interest rates.

“The bank may have to move back toward a more orthodox policy and raise rates in the coming months as there is no sign of cooling credit growth, the current account deficit keeps widening and risks are rising on the inflation side,” Societe Generale economists said in a report.

Başçı inherited an inflation rate of 4 percent, the lowest in four decades, and an economy that expanded at a rapid pace of 8.9 percent last year. Inflation is likely to accelerate for the rest of the year, however, as higher global oil prices feed into the economy. The Central Bank is aiming for year-end inflation of 5.5 percent.

“Başçı is very well-known and respected among the investment community for his actions, statements and academic career,” said Özgür Altuğ, the chief economist at BGC Partners in Istanbul.

Backdoor policies?

But Neil Shearing, the senior emerging markets economist at Capital Economics, expressed some doubts. Calling concerns about increased government influence over monetary policy “probably overdone,” Shearing said the bigger issue is whether the bank will “act quickly enough to curb a credit bubble and rein in the widening current account deficit.”

Despite record-low inflation, the underlying inflation outlook is much less reassuring, said Shearing. “Domestic demand, which has boomed on the back of [annual] credit growth of 40 percent, is starting to run into capacity constraints,” he said. “This is best illustrated by the widening current account deficit, which is on course to top 7 percent of gross domestic product this year.”

Inflation is likely to rise to “7 percent or so” by the end of the year, Shearing added.

The London-based economist also had a more serious warning, noting that despite the low level of the benchmark interest rate, the Central Bank “has actually been raising interest rates via the backdoor.”

“Higher bank reserve requirements, coupled with the fact that the Central Bank is providing less liquidity to the market via its repo auctions than banks are currently demanding, has resulted in a marked increase in inter-bank lending rates over the past couple of weeks,” Shearing said.

Gov. Başçı, who attended Johns Hopkins University in Baltimore, was a student at a private high school in Ankara at the same time as Deputy PM Babacan. Their families ran businesses in the Ulus suburb of the Turkish capital. Başçı acted as Babacan’s adviser in 2003 before he was appointed to the Central Bank. He served as acting governor for a month in 2006.

SOURCE: HURRIYET DAILY NEWS