The Kapali Carsi

More potential red flags in IMF’s Turkey Staff Report

To clarify upfront, I am not discussing a published document. As I detailed at a post last week, that I cannot do, as the government has refused to approve the Report. However, what I can do is speculate on what appalled the government so much, and I have already done so in my latest Hurriyet Daily News column.

There, I argued that the Fund is mainly worried about fiscal policy. However, there are three other potential red flags that could have made into the report:

First, while preparing for my discussion on IMF’s recent reserves adequacy paper, I noticed that Turkey’s reserves looked especially low. That point made it to the presentation (first time trying out Sugarsync, hope it works) of my discussion as well, but there are two disclaimers: 1. Staff Reports are usually mute about reserves. 2. The Central bank has increased its reserves quite a bit since last year:

So Turkey is definitely in a better position in terms of reserves since the paper (and the Staff Report for hat matter) were finalized. But IMF’s reserve adequacy metric also takes into account a country’s vulnerabilities, one of which is the Balance of Payments. Those vulnerabilities have increased as well!

Then, there is of course monetary policy. I would think that the Fund would not think much of the Central Bank’s unconventional policy of reducing the policy rate while at the same time hiking reserve requirement ratios, or RRRs. They might have also emphasized the inconsistencies in liquidity management. And I would think they would call for a more active banking regulator, as it is much better-tooled than the Central Bank to curb lending. But BRSA seems to be cool with all this, since individually, each bank looks healthy. They just don’t get that in banking, the sum of all the parts is not necessarily the whole (or they do get it all right, but they are not really independent!), so the Fund could have come out in that regard as well.

Finally, a reader noted, after last week’s post, that he believed it was IMF’s worries about housing loans that had pissed off the government. I do agree that the whole housing system is prone to big disasters. You might think I am high, especially since derivative products that wrecked US housing are not available in Turkey. But the whole model of a contractor borrowing from the bank and the same bank then lending to the contractor’s customers is flawed. While it is good business for the banks, if a project goes under, the bank involved would be liable to huge losses. In fact, that’s why I thought it was a joke when I heard that some bankers had discussed setting up an intermediary-based mortgage system similar to the one in the US in an Association of Banks working group. It is fine with me if they want to shoot themselves in the foot, but they would do a great service to the stability of the sector:) But having said that, I am not sure housing loans per se made it explicitly to the Report, although the Fund has definitely discussed credit growth.

Note that none of these is a HUGE concern, but having these in the Report could have ticked off the government nevertheless. Also, I did not mention the current account deficit because that’s something everyone can see. The government would not object to that much, but it would have more to protest to intricacies like loose fiscal policy or inadequate reserves, which have been off the investors’ radars…

2 Responses to “More potential red flags in IMF’s Turkey Staff Report”

MoneyMongolJune 18th, 2011 at 9:31 am

Turkey is part of the global economy. Therefore any assessment into its economic situation must factor political, and economic developments occurring through out the world. The economic crisis in 2008 demonstrated this, but also showed the resilience of the Turkish economy as it quickly recovered from it. Riding this wave of economic recovery/success, the AK party pummeled all others in the recent election.

Success however can breed complacency, which seems to be the case with the AK Party. Though there is increasing talk of the Turkish economy overheating, and possible property bubbles – those in power in Turkey, along with some economists seem to be in denial.

In my view, Turkey needs to slow its economy down, and tackle its debt issues, Failure to do so may 'feel' better both politically and economically, but will only serve to cause more pain later.