16 Mart 2011 Çarşamba

Turkey Sees a Break From Hot-Money Flow

Marc Champion & Joe Parkinson    The Wall Street Journal

ANKARA—Japan's devastating earthquake and tsunami could have an unsolicited benefit for emerging markets, reducing massive short-term investment flows they have struggled to absorb, Turkey's central bank Governor Durmus Yilmaz said.

Stressing that any economic impacts fade in importance next to the enormous and still unfolding human suffering in Japan, Mr. Yilmaz also said Tuesday that in the longer term he believed the need for Japan to rebuild "will regenerate the Japanese economy."

Emerging markets around the globe saw a selloff of assets Monday, as appetites for risk fell in the wake of Japanese Prime Minister Naoto Kan's warning that the danger from radiation leaks at the damaged Fukushima nuclear power plant was growing.
That flight from risk will likely also reduce Japanese carry trades, in which investors borrow low-cost yen to invest in higher-yielding, short-term assets in Turkey and other emerging markets, Mr. Yilmaz said in an interview at his office in the Turkish central bank headquarters in Ankara.

"In that respect, the suffering of the emerging-market economies from the expansionary policy of the developed economies will ease," Mr. Yilmaz said.

Mr. Yilmaz also repeated that the bank will wait until the end of this month to assess whether its own policy aimed at deterring these unwanted "hot money" flows is working—implying that the bank will leave interest rates on hold when it meets next week—but that measures to squeeze bank lending could "need further tightening."

Mr. Yilmaz has run Turkey's central bank since 2006, a period in which Turkish economic growth has outperformed most others and inflation rates have fallen to record lows. But he acknowledged on Monday that after he leaves office next month, his legacy will be determined by the eventual success or failure of the unorthodox policy the bank adopted late last year aimed at taming hot-money inflows and credit growth simultaneously.

Asked whether, should the policy fail, he risked sharing the fate of former U.S. Federal Reserve Chairman Alan Greenspan—lionized in office but later blamed by some for contributing to the U.S. financial crisis through overly loose monetary policies—Mr. Yilmaz called that "a fair assessment."

The central bank's two-pronged monetary policy has been buffeted lately by turmoil in the Middle East and North Africa, which drove up oil prices. That triggered a selloff of Turkish bonds and a spike the price of Turkish credit-default swaps earlier this month.

"I think the market reaction in terms of the policy mix has not been warranted," Mr.Yilmaz said, because it was perceived as loosening monetary policy when in fact it tightened.

Under the policy, the central bank has cut interest rates twice to 6.25%, a record low for Turkey, in an effort to make short-term Turkish assets less attractive to foreign investors. Hot-money flows are unwelcome for emerging markets because they can be withdrawn quickly if risk appetites change.

At the same time, the bank has sought to reduce booming credit growth of 34% last year by raising reserve requirements for commercial banks. Both measures aimed to reduce the country's soaring current-account deficit, forecast to hit 7.5% of gross domestic product this year.

Mr. Yilmaz said he was obliged to adopt an "innovative policy using conventional instruments" to achieve financial stability over price stability. Cutting rates has helped weaken the lira, which should make imports more expensive and exports cheaper. Reducing credit growth should also help rein in the consumer-spending spree on imports, and so narrow the current-account deficit, he said.

Credit growth in mid-February was more than 35%, but Mr. Yilmaz said economists need to wait until at least the end of March to judge whether his policy is working, because much of the impact from the increased reserve requirements has yet to feed through.

He defended himself against charges that he has given the government a free pass to spend ahead of elections in June, when some economists say it should cut spending to calm demand. He said he had asked the government to use rising tax revenues to pay down debt—which it has done.

"We constantly warn the government that the monetary policy stance is very much dependent on what they do. Therefore, if the fiscal policy is not sufficiently tight, the central bank would change its monetary policy stance," Mr. Yilmaz said. That would mean raising interest rates, an unwelcome prospect ahead of elections.
Oil prices have eased and yields on Turkish bonds have risen somewhat since earlier in the month, but some economists remain skeptical about the bank's policy, in part because they couldn't find data to support Mr. Yilmaz's statement that $10 billion in "hot money" had exited the country since the policy began.

"Rightly, the international investor community are asking: where should we look?" Mr. Yilmaz said. He said that since he made the $10 billion statement, "a majority" of those positions had returned. But he said much of the returning money appeared to be investing in longer-term securities, which was his goal.


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