The Kapali Carsi

Saving Private Savings: The Turkish Savings Trilogy

In the spirit of The Lord of The Rings, I recently attempted my own trilogy about the low Turkish private savings, along with a cheesy title paying homage to one of my (and everyone’s I guess) favorite WWII movies.

In fact, I was never planning a trilogy when I first wrote about the issue right after the IMF-WB meetings in Istanbul back in 2009:

One of the big themes of the IMF-World Bank meetings was that global imbalances, widely seen as one of the underlying causes of the crisis, need to be corrected.

You can read the whole thing here. After that column, I mentioned several times in my blog posts as well as HDN columns that Turkey’s current account deficit is really a savings shortfall problem. So when I learned that the World Bank’s new Coandum untry Economic Memor(CEM) was about the same topic, I just had to go to their presentation in Istanbul and summarize their findings in the column:

At $6 billion, the January current account deficit came in higher than market expectations of $5.5 billion, not to mention Economy Minister Zafer Çağlayan’s optimistic $4 billion projection. According to Sabah, this would make Çağlayan a “karavanacı” (someone who completely misses the target), as the Turkish daily has called economists whose forecasts have been off.

You can read the whole thing here, but I go on to link the current account deficit to the savings deficit before introducing the World Bank study, which shows that it is the household savings (as opposed to corporate savings, which actually increased until the 2008-2009 crisis) that have plunged in the last decade. I also summarized the CEM’s findings on the reasons behind this sharp decline in household savings, and then ran out of space!:) (I have a 3200-character ceiling, as the column appears in the hardcopy paper).  Therefore, I had to write a third column, where  I went over the CEM’s policy recommendations on how to increase Turkey’s savings rate:

Last week, I linked Turkey’s current account deficit to its low savings rate and summarized a recent World Bank report’s findings on the causes of the low savings.

In this case, studying the roots of the problem is much more than an intellectual exercise. Some of the policy recommendations to boost savings come right out of that analysis. For example, education and women’s labor force participation have turned out to be associated with higher household savings, even after adjusting for income.

You can read the rest over at the Daily News web site. As you’ll see there, one of the recommendations of the CEM was boosting enrollment in the private pension system. The government is well aware of the problem, as econ. tzar Babacan recently noted, and it was known that they had been working on the issue for a while. So it wasn’t such a big surprise that when they announced yesterday some measures to boost the savings rate, one of the schemes was about private pensions: Basically, the state will contribute an extra 25% on behalf of the participants. I like the idea because not only it incentivizes (is that a word?, OK let’s say “nudges”, to pay homage to the great book) folks to use the system, it is also public savings in disguise… Merrill Lynch (or should I say Bank of America?) Turkey economists estimate the budgetary cost of this to be about 0.7% of GDP, where they project it to decrease the current account by 0.4%- which is incidentally roughly how much a fiscal restraint about the same magnitude would have impacted the current account deficit, assuming a crowding out of 50%…

Some of the other measures announced yesterday, which may have some impact on savings as well, were: Lowering or elimination of income tax on longer-maturity bank deposits; elimination of withholding tax on equity funds, tax breaks for venture capital and measures to create a sukuk market. Note that you may also see these measures as part of the government’s attempt at becoming a financial center. BTW, I have a financial center trilogy as well, in case you are interested: The first episode was also written around the time of the IMF-WB meetings back in 2009. The second episode came out after a high-level brainstorming session + conference in Istanbul last spring, and the final episode while I was patiently waiting for the Omnibus Law that was going to make radical changes to the financial landscape (that law has yet to come out!).

All in all, I’d have to say these measures are rather positive for boosting the savings rate, but only a weak first step towards making a financial center out of Istanbul.

BTW, if you want a totally different (cultural and phonetical, of all things) approach to Turkey’s current account deficit and savings shortfall, have a look at my column on foreign languages.

Finally, there were also a couple of interesting news articles in the last few days in Turkish dailies on how gold accounts had risen. Tapping the under-the-pillow (we use pillow in Turkish rather than mattress; maybe that’s because our savings easily fit under a pillow!) gold reserves of households is part of this broad strategy as well, whereby the Central Bank recently allowed banks to hold some of their required reserves in gold, and banks are responding with innovative gold accounts. On an interesting side note, when the government and the Central Bank first revealed their intentions, there was some discussion on exactly how much gold there was under the pillows, with a five-ton figure showing up everywhere. That was weird, as it would mean that Turks have gold equaling nearly 40 percent of GDP at the current gold prices! I looked up the figures from the World Gold Council, which put the gold demand over the last 15 years at 3 tons. And this number is an overestimation as well since it assumes there are no exports. Besides, gold is used for consumption as well (mama selling her gold so that the son can get a car or get married). All in all, the actual pillow-gold is probably much lower than 3 tons, but even 1-2 tons would still mean a very sizable sum (10-20% of GDP)…

I already said finally!, but “really finally”, while all this is good, there is a structural side to the current account deficit as well, which the new investment incentive scheme (NIS) is trying to address. I’ll take on the NIS in a later post, as this post has already become kind of long and I am starving!:)…

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