With the USA expected to finally normalize interest rates later this year, Prof. Turalay Kenc, Deputy Governor of the Central Bank of Turkey, says his country has taken all the necessary measures to ensure its financial stability isn’t threatened by decisions taken beyond its borders
One of the main objectives of the Central Bank is to design and implement policies to achieve price stability and contribute to financial stability. Turkey, since 2002, has largely been one of the success stories of the global economy. How important a role has the Central Bank here played in creating the conditions to allow Turkey to flourish economically for much of this century?
There were many reforms that we adopted right after the 2001 financial crisis in Turkey, including the independence of the Central Bank. Along the way, the Central Bank adopted firm price stability as its main objective. It also adopted implicit inflation targeting, then an explicit inflation targeting regime. As a result of that, we achieved price stability over the last ten years.
Over time, we had different episodes. In the early 2000s we had a high growth global economy, so there was a very good climate for the Turkish economy, but at the same time, Turkey adopted the right policies and reforms, which helped us a lot to reap the fruits of the growing global economy.
But right after that, the world had a global financial crisis from 2008 onwards and we entered into a new episode. Together with other G20 countries, we stimulated the economy. The Central Bank cut the policy rate in 2008-2009 because of the decline in the Turkish GDP. That policy was quite successful, and then in 2010-2011 we achieved second highest growth rates in the world, after China.
Later, we entered another episode, which is basically characterized by uncommercial monetary policies and very low interest rates in the global financial markets. So, as a result of these uncommercial monetary policies implemented by the major central banks, we faced excessive and very volatile capital inflows. During that time we did not have a Financial Stability Committee; we set it up later on. We did not have the Financial Stability Committee in 2010-2011, so the Central Bank was a pioneer in bringing financial stability issues to the attention of the public. In 2010-2011 and onwards, we implemented policies to strengthen financial stability to Turkey and deal with the excessive capital inflows we had. Those policies were quite effective and successful in terms of lowering the excessive capital inflows. As a result of that, our current account deficit initially reached 10% of GDP.
Thanks to the policies adopted by CBRT and other institutions, we managed to bring the current account deficit to reasonable levels in 2012, 2013, and 2014. Current account balances, excluding gold imports, improved from late 2010 onwards. The main contributor to this decline was the CBRT’s policy. After the establishment of Financial Stability Committee, we focused on our main objective of price stability.
What are the key lessons from policies adopted in Turkey post-2001 that can be applied elsewhere as the world tries to emerge from the ashes of the 2008 financial crisis?
Very orthodox policies, fiscal discipline and privatization were perhaps the key aspects of Turkish policies that we followed right after the global financial crisis. We communicate our policies quite well. For example; our 6.5 percent primary surplus target was known even by people in the street. That was a quite successful communication strategy; since then public and the governments in power followed and supported these polices. So, we can say, we were orthodox and we followed the right policies.
At the meeting of G20 finance ministers and central bank governors in Washington in April 2015, the communique warned of a heightened risk of financial volatility as the monetary policies of major central banks begin to go their separate ways. What will be the impact of the widely predicted US increase in interest rates this year on emerging economies such as Turkey?
Central banks of the emerging economies are required to be well-prepared for the normalization policy of the US Federal Reserve and conventional policies of major banks. Turkey, like other emerging market economies, faced similar episodes in the 1990s and 2000s. We have experience and so we are well prepared this time; we accumulated reserves and already prepared ourselves for an eventual FED normalization. We have been introducing new policies; among these, we can say prudential borrowing, improving the choice between core and non-core liabilities, improving maturities of FX liabilities of Turkish banks and improving an external safety net. So, we have implemented number of measures and we have number of other measures in our hands.
Turkey’s G20 Presidency is focused on promoting sustainable worldwide growth through collective action. This commitment is manifested in the three I’s of the Turkish Presidency: Inclusiveness, Implementation and Investment for growth. In this framework, could you elaborate on the role of capital markets in enhancing financing for governments, infrastructure and the corporate sector?
There has been work on promoting market based finance at the G20. Given the problems of banks, especially in Europe, which are having difficulties in intermediating savings to small companies, we need an alternative source of financing. Capital markets can have a big role in this; during downturns, it seems that the market based system is going forward with bank based finance. It is used well in the UK and USA; they did well in trying to promote market based finance.
On top of this, there is more work going forward: G20 countries are trying to mobilize the investment, pension and insurance funds to use in the long-term financing of infrastructure projects. Many G20 economies have investment gaps that must be filled. At the G20 meetings, asset based finance practices like sukuk are also highlighted; it’s a system that many countries rely on, there is a great potential. These sort of practices are more resilient than others, so promoting them is very helpful and important.
Turkey has embraced opportunities in Islamic finance in recent years. Can you expand more on the rationale behind the expected expansion of participation banks here in Turkey?
Islamic finance is growing significantly. In Turkey, all state owned banks are planning to open as participation banks. There will be a big supply impact on the financial market. Currently we only have a few participation banks, most of them are private banks. On the conventional side, we have public and private banks; now we are going to have a similar picture in this field also. So, more products, more funding and of course more loans are going to be available for Turkish businessmen and Turkish households. It will be a significant change on the participation bank spectrum. Perhaps we need new instruments to cater for the needs of savers’ and investors’ preferences.
To end with a more personal question: You had a long and very successful academic career in the UK; what motivated you to come back to Turkey and accept the call of the Central Bank?
Turkey is a fascinating and growing country and my current job here is a challenging one. The Central Bank of the Republic of Turkey is an institution where I can channel all my theory and understanding into policy for the benefit of my country.