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Food for Thought


GRF Board Member, İşbank CEO, Mr. Adnan Bali’s Assessments on the Turkish Economy and the Speculative Attacks Targeting the TL

GRF Board Member, İşbank CEO, Mr. Adnan Bali’s assessments on the Turkish Economy and the speculative attacks targeting the TL, published by the newspaper Dünya on August 13, 2018.

Please find below Mr. Bali’s evaluations, published at Dünya newspaper:

"Adnan Bali, CEO of Is Bank, said that considering the latest incidents, this is no event to be accounted for by normal market dynamics, and that a serious speculative assault is staring us in the face.

Bali spoke at length regarding recent events. Stating that Turkey is facing hard times, Bali remarked, "It is very clear that Turkey is under a serious speculative assault. I am a manager with a Treasury background. Since the ’90s I have come to know how exchange markets function. We have experienced the ’94 crisis, the ’96 Asian crisis, the ’97 Russian crisis, the earthquake in 1999, and the 2001 crisis. A certain level of fluctuation is inevitable in such cases, which is what happened then. However, this time it’s different. I don’t think it is natural...Sometimes I’m worried that even such people who have a grasp of all the technical details, such as us, tend to think in terms of conspiracy theories. But events provide confirmation." Bali stated that the current stand of the exchange rate is not explicable in economic terms and further said, "In economic theory we learned that cross rates of two countries are calculated using the difference between rates of inflation in the said two countries. Seen through such lenses, the current situation does not fit any demand or theory. On the other hand, what we cannot explain in economic terms is this: the rate of budget deficit to GDP shall exceed 2% by end of June, which has been in the 1.1-1.3% range for years. It is expected to be a little over 2.5% by year’s end. Compare this to the Maastricht criteria, to EU member countries, and to similar countries in the same group as Turkey. Despite some broadening in spending, it is an extremely important sign of fiscal discipline. The second point is, the ratio of government debt stock to GDP used to be below 30%, but with the current rise in exchange rates, this ratio may have come to over 30%. Still, compared to EU, including Mediterranean economies where 3 times this rate is found, it is not bad. This is the scenery…"

The situation cannot be explained using economic terms.

Stating that the issue of debt payment is a hot topic, Bali went on: "I had explained this with numbers following July 15, when relevant as well as irrelevant ideas and assessments were being thrown around. I’ll use similar means here. The amount of Turkey’s debt with one year to maturity is 180 billion USD; 180.6 billion USD, to be precise...This is a significant number, leading one to think ’how do we find our way through this?’ The matter lies in the details...That is where specialization comes into play...The society as a whole needs to be well- informed and convinced. There are ordinary citizens who, upon hearing the words ’speculative assault’, shall naturally end up at bank branches to withdraw their money. They need to be informed correctly. In that sense, 102 billion USD of the 180 billion USD is the banks’ liability. Half of this amount, that is 50+ billion USD, is not bank debt but deposit accounts in the care of Turkish banks by non-residents; the rest is debt...Cumulative roll-over rate for 12 months is close to 110% in the banking system. That rate dropped a little recently but it’s at a manageable level. Against this approximately 50 billion USD debt in cash, there is about 30 billion USD at CB as required cash reserves. Plus, there is a 50 billion USD limit the CB shall let the banks use. Cash-convertible exchange liquidity in the Turkish banking sector as a whole is about 50 billion USD. Therefore, there is nothing problematic in this picture." Bali pointed out that the remaining 73 billion USD is the foreign liability of the real economy, 43 billion USD (65%) of which is commitment borne out of trade of goods and services. The remaining debt in the amount of 25 billion USD is made up of cash-like loans, the 12-month cumulative rollover rate for which, although in a downward trend, is above 130%. In terms of the effect of short positions and rising exchange rates, Bali said, "There are no short positions in the banking sector. This is the most prominent difference to previous crises. But there are short positions outside of the banking sector about 217 billion USD. This number may be frightening at first glance but there is again minutia to it. First of all, the real economy has a net surplus of 6.5 billion USD in the short term. The maturity is up to one year. Both the real sector and the economy at large have the opportunity to take certain precautions. Thus, we see that since mid-2013 the real sector has been on the plus side in the short term. From experience I can say that positive positions of investors’ personal accounts are not taken into consideration when firms are being considered." Indicating that the current deficit is 5.7%, Bali went on, "Here is a comparative case. There was no surge in the exchange rate at a time when current deficit levels approached two digits and the oil price was 130 USD per barrel. Today, both of these indicators are almost halfway down, yet here we are with a sharp rise in exchange rate. That’s why I insist on my point that there are no economic reasons behind it. It cannot be explained in economic terms." Stating that the exchange rate rises made him sad both at a personal and a professional level, Bali said,: "There are people with debts who are affected adversely. Like watching the heart rates of my parents back in the ’80s, I find myself looking at dollar rates to see who gets hit. We have to defuse, work on, and attend the situation. Although it isn’t economically based, we have to take some economic precautions."

Action plan shall carry us to a whole new level in terms of management quality.

"Considering the latest incidents, this is no event to be accounted for by normal market dynamics. This is, as it is well put, an economic war. What is required of us is that we should be able to foresee such an assault and make a precautionary move. We have to act fast. Now is the time for action, not words. The best weapon of those with bad intentions is the lack of adequate action. Markets penalize that. The CB took some measures as of this morning. In addition to regulations regarding swaps, the BRSA took measures to eliminate problems regarding valuation of securities that have come to exist due to the extraordinary market conditions. This is the situation right now. In my opinion, these are good decisions. There will be repercussions in the market. In this day and age, we have to put to use all our capabilities with the support of such technical resolutions", Bali went on. Bali said that as the Banking Association, they have directly consulted and shared with the authorities and the relevant Ministry, the framework they have formed. He further stated, "I know for a fact that the work environment regarding this issue is very cooperative and open. What I care utmost about is a detailed and technical action plan...Determining responsibilities not just of institutions but also of individuals, perpetual commitment to the public, and transparency in sharing performance with the public... I believe that it will carry us to a whole new level in terms of management quality."

No deposit exit.

Stating that there was no exit of deposits from the bank and İs Bank was a good example to watch changes in behavior in retail banking during this period, Bali further said, "It’s business-as-usual. In terms of foreign cash demand, there was some increase of no real significance. Nothing that cannot be managed. It is normal and fine. We have to provide for that. On the other hand, there is nothing special about exchange transactions. All through last week we had balance in exchange transactions. On Friday there was a slight increase in volume, but overall it was neutral. There were sales as well as purchases. On July 15, as is usually the case following disastrous events, there were some serious sales on the part of ordinary citizens. There is no such thing this time around." Regarding rumors about expropriation Bali remarked," In all the official meetings I attended, I have never witnessed a serious assessment of this matter beyond hearsay. However, word gets around, especially through social media. The Republic of Turkey is a country that has paid debts dating back from the Ottoman period, a country that has never in her history applied such measures...The very thought of it is not right. It is a formidable risk, in the market, to even mention that this isn’t being considered."

We need to share the difficulties faced by our country.

Bali had the following to say regarding money exiting the system and being transferred abroad: "Objectively speaking, in a liberal economy it wouldn’t be correct for me to judge individuals and institutions for doing such things for whatever reason...But then there is also a subjective side to it. As a citizen, you have earned the money you’re transferring abroad, here in this country. I don’t think that’s acceptable. We are not just an ordinary society having gathered to share the welfare the country has to offer. When necessary, we shall share difficulties faced by our country. Even the registrar says ’in good times and in bad, in sickness and in health’. I believe that citizens and institutions have a duty. This institution was established by Atatürk on August 26, 1924, on the first day of the Great Offensive, with the perspective that economic independence is necessary for enduring political independence. We all need to act with such a range of awareness. On the effects of current developments on the Banking sector, Bali commented that the sector would strive to manage capital adequacy, and current developments not only decreased profitability but also led to a rise in risk-weighted assets. He said, "We’ll tread lightly in terms of liquidity and payments. Of course, this responsibility is not solely on the banking sector." Bali also remarked on forecasts for the rest of the year in the sector: "If we can at least have some sort of stability in exchange rate levels in a manner that meets the needs without a huge increase in loans, we can increase loans by spreading loan volume throughout the year. Until exchange rates achieve stability, we cannot increase loans. The current stance in capital adequacy, as a result of the surge in exchange rates, forces us legally to act in a different manner. Anyway, that’s the way a prudent bank should follow."

If necessary chemotherapy is performed. Interest rate is quite similar...

 Bali stressed that interest rates were not yet at a very critical level. Stating that the current situation has to be maintained via free market mechanisms, he said, "Having a high interest rate is unsavory. It is also distasteful in terms of banks’ balance sheets. Our deposits have a 35-day average maturity period. That is, following an increase in interest rates, we are faced with increase in costs as a result of re-pricing of deposits, which constitutes 60% of our resources, in 5 days at the most. However, we cannot reflect this increase to our assets in the same time frame because the average maturity of the assets is much longer. As a result, net interest margins tend to shrink. Therefore, banking officials do not demand high interest rates because it’s not good for them. We earn the highest profits when interest rates fall because deposits of 35-day maturity get re-priced and the costs decrease. But the higher-rate income from assets created beforehand will keep you going for a while. Thus, I believe that regarding interest rates we should be following what the science of economics say. We may not like it, though. It is an obnoxious example but still; if need be, then chemotherapy must be performed. Do we like it? Of course not...Interest rate is similar. Every instrument should be usable if the need arises, although it does not mean you like it." Regarding foreign viewpoints, Bali indicated that matters such as upkeep of the quality of assets in the banking system and the debt service of the real economy, naturally matters of concern, had been discussed. He went on to say, "We talk about these as much as we possibly can. For instance, in their assessments they tend to overlook other macroeconomic factors. Of course, foreign business people express concern. We have to remain in close contact and provide them with realistic information."

Rating agencies should not be seen as centers of objectivity.

 Regarding credit rating agencies Bali said, "I don’t see a technically coherent picture there. It took Turkey years to get the investable country grade, yet lost it instantly. It even went lower than the previous grade. Back in the day, I said that it should be nourished like a dowry. If we hadn’t lost our ratings, CDS levels wouldn’t have been as record high as today. However, we have to avoid the fallacy of treating rating agencies as centers of objectivity. They are included in the eco-political realm. The resolutions they arrive at have everything to do with geopolitical, political, and economic conditions and trends. In general, they tend to take sides. They are hesitant when it comes to improving and hasty in downgrading. Plus, they lack consistency in their resolutions. For instance; South Africa (SA) and Turkey are in the same category. Growth rate of SA is .3%, and that of Turkey in 2017 is 7.4%. Rate of budget deficit to GDP is 3.8% in SA, and 1.5% in Turkey. That is double. Rate of public debt to GDP is 52.7% in SA, and 28.3% in Turkey. And this is almost half...Unemployment is around 11% in Turkey and 27.5% in SA. South Africa ranks as an investable country. Turkey has a grade lower than that of South Africa. Where is the consistency in that? It has been this way in the past, as well."

Turkey is experienced in crisis-management.

Pointing out that it was not the first time Turkey faced hardships, Adnan Bali, CEO of İş Bank, said, "Our ancestors were faced with more difficult circumstances when they established the Republic in 1923 in great poverty. In my opinion, we can overcome today’s hardships, as well. We have experience in crisis management, and managers in public and private sectors with much experience in crisis management. I believe that we have to do what’s right in a well-coordinated manner, without sacrificing any priority and without confusing ourselves with domestic matters, especially with respect to foreign commitments."

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