A New Dawn: Hope for Sound Policies in 2024
Looking back at a key moment, we can see the origins of current economic policies. It was when new economic management team has been appointed. This decision marked a significant departure from the previous era of ultra-low interest rates and consistent interventions in the lira's value. This strategic move has played a crucial role in shaping the economic landscape we are experiencing today.?
In a scenario reminiscent of Charles Dickens' 'A Tale of Two Cities,' we are witnessing a dramatic transformation in our economic landscape. Much like Dickens' portrayal of two vastly different worlds, the recent shift in policy framework marks a stark contrast to the previous era.
Crisis Averted
The Central Bank of Turkiye's decision to increase the policy rate from 8.50% to 42.50% represents a significant shift in its monetary policy, aimed at rebalancing the national economy. This substantial increase in the policy rate was a strategic move to combat inflationary pressures and stabilize the Turkish economy.
As a direct consequence of this policy shift, Turkiye's credit risk premium experienced a notable decrease, falling from 487 to 284. This reduction in the risk premium reflects a growing confidence among investors and economic agents in the stability and resilience of Turkiye's economy. Ultimately, the Central Bank of Turkiye’s assertive action in adjusting the policy rate demonstrates the profound impact of monetary policy decisions on a country's economic health and investor confidence.
Dismantling the Ineffective FX-Protected Turkish Lira Deposit Scheme
During a severe currency crisis, the government introduced the FX-Protected Turkish Lira Deposit Scheme, an initiative aimed at stabilizing the situation. The government introduced the scheme to reverse dollarization, support the lira and lengthen the tenor of lira deposit funding. Customers who switch will be compensated if the exchange-rate depreciation on their new holdings exceeds the interest rate, with the authorities covering the cost. FX-protected deposits were recorded as?TL 520.14 billion?in the week of February 25. In other words, potential foreign currency demand is appr.?37 Billion USD, thanks to unlimited and cost free government protection. At their peak, FX-protected deposits soared to a historical high of 130 billion USD.
However, over time, this scheme inadvertently became a source of a major confidence crisis, contributing to an excessive influx of Turkish Lira into the financial system. This abundance of the currency led to inflationary pressures, effectively de-anchoring inflation expectations. As a result, what was intended as a stabilizing tool turned into a significant economic challenge, exemplifying how policy decisions can sometimes exacerbate problems rather than solve them in the realm of macroeconomic policy. This scheme, initially seen as a potential solution, has ironically become a flagship example of policy missteps in economic management.
The recent changes in macro-prudential regulations have led to a reduction of over 35 billion USD in FX-protected deposits. However, there remain significant challenges in completely phasing out these deposits.
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Some Sort of Positive Real Rates
In 2021, the Governor of the Central Bank of Turkey's announcement ending the policy of positive real rates caught investors off guard. This decision concluded the practice of maintaining positive real interest rates, leading to various significant impacts. Turkish inflation lost its anchor, prompting a surge in money demand as individuals sought to safeguard their purchasing power. Many turned to alternative investments like real estate and vehicles, or any asset other than the Turkish Lira, to preserve value.
This shift contributed to a substantial increase in the trade deficit and triggered a flight of investors and Turkish citizens, who moved their foreign currency assets to banks overseas. Consequently, the country experienced a severe drain in foreign currency liquidity, and the cost of foreign exchange risk soared to critical levels.?
Nevertheless, the recent shift in policy has started to yield a more positive outlook in terms of real interest rates. Numerous investors remain wary, questioning whether a similar policy change could happen again.
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Associate Prof, University of Ottawa
1 年Unfortunately, I do not think there is much hope for Turkey. The ‘new’ team of individuals at the Bank of Turkey and Ministry of Finance are as much opportunistic as they are entirely incapable of controlling the economic situation of Turkey. Nor do they even understand the economic situation of their country. It is cronyism and personal interest in a new disguise - that’s all - same old story, no dramatic change. A tale of the same country. A university professor in Turkey is paid, for teaching one course per term, the equivalent of 4 dollars per day. This is what a European cow receives indirectly as subsidy for the farmer. If Turkish people desire to remain in this mediocracy, it is up to them.