Recent Economic Developments in Turkey As of November 22nd, the financial markets entered into turmoil due to an extreme liquidity squeeze. It can be said that the recent liquidity problem emerged mainly from the changes in the behaviour of the banking sector. Anticipating a decline in the profitability of treasury bill operations, banks switched to the credit market which is by definition, less liquid.
Change in behaviour stemmed from a substantial fall in the interest rates from the inception of the new economic program. During this period, the deposits of the banking sector fell in real terms and the maturity of deposits declined. This further constrained the liquidity position of the banking system.
The banks resort to the foreign resources as a means to finance mainly in the form of short-term credits. However, the liquidity problem soared due to the seasonal year-end FX demand of foreign institutional investors. The strengthened open position requirements accompanied by the long holiday period in year-end intensified the local banks' foreign exchange demand earlier than usual. Foreign investor's seasonal FX demand was also augmented due to the deterioration in the economic situation in Argentina as well as the delays in structural reforms in Turkey. Shortcoming in the expected FX revenues from privatisation raised concerns about the future of the economic program.
Consequently, on November 22nd the Central Bank sold about USD 1.5 billion to the market and the overnight repo rates hit 200% levels and the rates in the secondary bond and bill market rose to 50%.
However, in contrast to the Central Banks' view, increase in interest rates did not curb the demand for foreign exchange. In fact the squeeze in TL liquidity fueled the demand for FX as it caused an increase in TL interest rates. These significant high interest rates were perceived as a risk rather than a higher yield and the FX demand from international players continued.
In the period between 17 - 30 November, the CB sold approximately USD 6.2 billion to the markets and the foreign exchange reserves of the CB is estimated to have declined from USD 24.2 billion to USD 18.5 billion.
The Central Bank announced that the net domestic assets ceiling would be restored at the new level attained in the last few days i.e. around TL 2000 trillion. Originally the net domestic assets target was set at TL - 1200 trillion, allowing for a fluctuation within a band of +/- 5% of the previous quarter's monetary base.
It is apparent from this announcement that the Central Bank has firmly reassured the markets about its position to stick to original monetary program and to the principle that the TL liquidity will be created only through FX purchases. This accompanied by recent declaration of Deputy Prime Minister Mr. Mesut Yilmaz, outlook for devaluation of the TL is highly unlikely.
The government and the Central Bank resorted to certain measures in order to cope with the negative expectations of the market; firstly, the government announced the time schedule for the privatisation of the Turkish Telecom. Accordingly, it is declared that 33.5% of the Telecom will be sold to a strategic partner with management rights and the bids for the auction will be collected until December 15th. Secondly, the law concerning the rehabilitation and privatisation of the state-owned banks and the supplementary tax package has been approved by the parliament.
These attempts although not expected to be effective in easing the liquidity squeeze and the tension in the market in the very short-run, imply that the government will make up for the delays in the reforms. Hence, culmination of aforementioned measures is expected to have positive impact on the markets in the year 2001. Furthermore, it is envisaged that the adverse pressure of C/A deficit, which is anticipated to be low due to expected modest growth of the economy in 2001, is going to be considerably lower than what it was during this year.
Appropriately, the government started the negotiations with the IMF for a Supplementary Reserve Facility (SRF). Currently an IMF mission headed by Mr. Michael Deppler, head of IMFs' European section, is in Turkey to negotiate the conditions for the extra funding facilities such as the SRF. It is envisaged that during this visit the CB's monetary policy, the rehabilitation of the banking sector together with the solutions to overcome the liquidity trap will be discussed.
According to the press reports of this morning an agreement with the IMF has already been attained and the official announcement about the details of the agreement will be made public tomorrow morning (Dec.6, 2000).
Recent Developments and Yapi Kredi Yapi Kredi, since July 2000, has accumulated significant liquidity as a result of proceeds from IPO of TURKCELL, repayment of government bonds and increase in the size of the international borrowing.
These funds were mainly utilised in TL and FX liquidity, FRN (Floating Rate Notes) of treasury with an expectation of high year-end liquidity demand. As of November 2000, Yapi Kredi has 65% of its TL securities in FRN (re-priced every 3 months) form.
On the lending side 64% of the loan book is FX denominated. These loans are less vulnerable to the interest fluctuations and repayable every 6 months or when deemed necessary. Since these loans are mostly extended for pre-export financing they are fully hedged against FX inflows of the clients.
Share of credit card receivables in the loan book is around 16%, general-purpose consumer loans is 6% and car loans and mortgages is 4%, altogether they make up to about 26% percent of the total loan book. Interest on credit card receivables is adjustable whereas general-purpose consumer loans are fixed. However with approximately 15 months to maturity and average amount of around 2000 US $ each, consumer loans yield around 50 % on compounded annual basis. Fixed rate loan book is approximately 4% of the total asset size.
The remaining 10% of the loans are TL corporate loans. They are short term and rates are adjustable. Both, FX and TL commercial loans belong to our existing clients with good track record and sufficient (130%) collateral. However, in view of recent developments in the financial markets and depending on the overall outlook of the environment need may arise to consider to review the Bank's provisionary policy.
In terms of the Bank's liability management, so far the strong market indication is towards high return TL investments in the form of flight to short-term repos or money market mutual funds both from TL deposits and FX deposits. This in turn may be taken as Turkish Publics disbelief in devaluation of the TL. It is generally expected that short-term rates will be high (around 100 - 200%) until the year-end where it is quite unlikely that levels of 1000 % will continue for another week.
During the week of turbulence, Yapi Kredi acted as net lender in the system and did not change limits of any banks operating in Turkey. However, depending on the current levels of interest rates, mark to market net loss from fixed rate government securities portfolio is expected to be around US $50 million.
Yapı Kredi / 05 Dec 2000