Hot money is the core of the thing

The developments witnessed in economy during this past week show us very clearly the importance of how money for Turkey. In this article I want to present you the developments on exchange rate starting from the meeting held by Prime Minister with journalists and media directors. First of all, I think that one of the discourses that was most heavily emphasised after the meeting was the prime minister’s statement “strong Lira is my personal cause”. It is not difficult to imagine the reactions of exporters to this attitude who claim that they lost competition in international markets due to strong TL. Then, early in the week, exporters met with Prime Minister only to return empty-handed. Nevertheless, I think that the most important advice they received is the advice on interest decreases, as we are one of the countries with highest interest rates. But this does not seem possible due to our dependence on hot money. The slight adjustments made in short term for decreasing interest rates cannot go beyond being facile. In addition, there are some other options for increasing competition such as decrease in input costs and special tax reduction. But how effective are they? This point is disputable as, first of all, in an environment of dependence on imported semi-finished goods and raw materials, input cost can decrease only by making TL stronger, but such a practice is absolutely detrimental to competition. Let’s come to special tax reductions. The application of this proposal will cause more deficit in the balance of payment of the government and will be possible by making the employees pay for the resulting price or decreasing real wages. This, in turn, will make demand even lower, which is already low, interrupt short-term investment, and bring about a decrease in interest rates. This will inevitably have an impact on hot money, which is the main channel of growth and cause it to escape abroad. These pressures and complaints of exporters show their impact on the monetary policy of National Bank. At this point it is disputable whether National Bank is an independent actor. This week two policies applied by National Bank give us proof that the bank cannot resist to pressures. But at this point another question comes to my mind: do the monetary policy tools employed by national are useful for exporters? Let us look at two developments in order to be able to answer this question. First, on September 29th National bank increased its reserves, which was the long-term demand of exporters, who had stated that the foreign currency that would be withdrawn from the market with reserve increases would pull the foreign currency higher and increase their competitive power. Since August 3rd, it is buying 80 million dollars in 40 million dollar + 40 million dollar option. National bank increased these purchases to 100 million dollars and it can come face to face with a very serious problem. The bank keeps part of its purchases in its safe whereas the remaining is evaluated abroad. The problem is that interest rates abroad are at the level of 3% maximum. But what is the interest rate for purchasing foreign currency at home? 7%. You can calculate its cost and impact on prices. A second development is the increases in required reserve ratios. (I want to state that Chairman of BDDK (Banking Organization and Supervision Board), Tevfik Bilgin, learned these increases from newspapers). Required reserve ratios in TLs were raised from 5% to 5,5% and Required reserve ratios in foreign currency were raised from 10% to 11 percent. In one sense, these increases seem to have been made with the idea that “banks made too much profit during crisis, let us transfer some of the pressure onto them”, and it seem that they will cause some 1 billion dollars reduction in profits. This monetary consolidation operation, which was a surprise, means that 2,1 billion TLs an d 1,5 billion dollars will be withdrawn from the market. In addition, another surprise decision was total elimination of the 5% interest which was paid for Required reserve ratios in TLs (remember that Fed applied this, too.) This is a point that deserves attention as this application seems to have been made for the exporters and will decrease foreign exchange rate; however, it will cause an increase in the interest rates on the contrary, as banks will calculate their losses through interest rates; the first signals were given by directors of Garanti and Akbank. But what is the result of these increases in interest rates? More hot money flow. Another detail: on October 2nd, it was announced that banks were allowed to issue bonds in TLs. It can be seen that all roads lead to hot money. Unfortunately growth depends on it. Its current costs are: 1) In seven months, direct foreign capital investments declines by 35% compared to the same period of the previous year. 2) between January and August, foreign trade deficit increased by 79% compared to the same period of the previous year. 3) current deficit is also increasing. In such an environment, many things which seem to be for the sake of exporters, actually serve to low exchange rate-high interest rate and hot money entrance. TL becomes stronger, imports are being stimulated, and exporters are always losing.