Basci, Policy Architect, Named Turkish Central Bank Governor
April 15, 2011, 4:30 AM EDTBy Ali Berat Meric and Steve Bryant
(Updates with markets in fifth paragraph, comment in eighth, IMF in 12th.)
April 15 (Bloomberg) -- Turkey may stick to its policy of matching low interest rates with higher bank reserve requirements after Erdem Basci, an architect of the strategy, was named central bank governor.
The main ISE 100 share index in Istanbul advanced and bond yields fell after the appointment of the 44-year-old economist, a school friend of Deputy Prime Minister Ali Babacan, the country’s top economic policy maker. The decision was forecast by 14 of 19 economists surveyed by Bloomberg last month.
Basci’s appointment “implies policy continuity at the central bank and will be welcomed by market participants,” Ahmet Akarli, London-based economist for Goldman Sachs Group Inc., said in an e-mail. “Basci has played a key role in shaping the bank’s policies over the past few years, particularly during the global financial crisis.”
The central bank is trying to restrain a boom in domestic demand that’s drawing in imports and driving the current-account deficit to record levels. Basci wrote the paper published on the bank’s website on Dec. 11 that revealed the new policy of low rates and higher reserve requirements, surprising investors and prompting a decline in bonds as banks sold assets to meet the extra commitments.
The benchmark share index rose 0.6 percent to 68,369.88 at 10:15 a.m. in Istanbul and yields on two-year lira-denominated government debt fell 2 basis points, or 0.02 percentage point, to 8.72 percent.
Current-Account Gap
Basci said in an interview in Prague on March 29 that the bank’s main goal is to rein in the current-account deficit. The cumulative gap for the 12 months through February was $54.8 billion, or about 7 percent of estimated gross domestic product, the bank said April 11. It was the largest 12-month deficit on record. The government’s medium-term plans forecast a gap of $42.2 billion, or 5.4 percent of GDP, this year.
The central bank reaffirmed its adherence to the policy in a March 23 statement, adding that new data or information may lead to revisions. Basci, who has worked at the bank since 2003, will chair his first monetary policy meeting on April 21.
“For markets, the combination of Basci and Babacan is something of a dream team,” Tim Ash, chief emerging-market economist at Royal Bank of Scotland Group Plc, said in a telephone interview yesterday.
Economic Boom
Babacan has been a key figure in Turkish economic policy since 2002, when the Justice and Development Party first took office. In that time GDP growth has averaged about 5 percent a year and income per head almost tripled to $10,043 in 2010, according to the Treasury.
Appointing Basci is “good for the predictability of the policy stance, good for accountability for prior actions,” Tevfik Aksoy, London-based head of emerging market economics for the region at Morgan Stanley, said in a telephone interview.
The bank has cut interest rates by 75 basis points to 6.25 percent since Basci’s paper was issued in December. Lower rates are designed to deter short-term capital inflows and weaken the lira, while increases in the reserve requirements cap growth in loans.
The International Monetary Fund said Turkish monetary policy is “still accommodative” and the current-account gap may expand to 8 percent of GDP this year, according to the World Economic Outlook published April 11.
Inflation Challenge
Basci will inherit an inflation rate of 4 percent, the lowest in four decades, and an economy that expanded 8.9 percent last year, a rate he called “very rapid.” Inflation is likely to accelerate for the rest of the year as higher global oil prices feed into the economy, the central bank forecast on April 5. The bank is aiming for year-end inflation of 5.5 percent.
Basci was Erdogan’s preferred candidate for central bank chief five years ago, ahead of outgoing Governor Durmus Yilmaz, though his nomination was rejected by then-President Ahmet Necdet Sezer, according to news reports at the time.
Basci’s wife, like Yilmaz, wears a headscarf in public, and upholders of Turkey’s secular constitution, such as Sezer, see such Islamic attire as a symbol of Erdogan’s efforts to allow a wider role for religion. Sezer also blocked the candidacy of Adnan Buyukdeniz, an Islamic banker. Abdullah Gul, a political ally of Erdogan, replaced Sezer as president in 2007.
Basci, who attended Johns Hopkins University in Baltimore, was a student at a private high school in Ankara at the same time as Babacan, who is in charge of the Treasury and the government’s economic policy. Their families ran businesses in the Ulus suburb of the Turkish capital. Basci acted as Babacan’s adviser in 2003 before he was appointed to the bank. He served as acting governor for a month in 2006.
--With assistance from Benjamin Harvey in Ankara. Editors: Steven Komarow, Ben Holland, Karl Maier, Philip Sanders, Heather Langan
To contact the reporters on this story: Ali Berat Meric in Ankara at americ@bloomberg.net; Steve Bryant in Ankara at sbryant5@bloomberg.net.
To contact the editor responsible for this story: Andrew J. Barden at barden@bloomberg.net.
