Economist Ali Ağaoğlu and economics journalist Hakan Güldağ discussed the effects of the Central Bank’s latest reserve requirement regulation on the markets in a wide range from banks to the stock market in the Chance Talks this week. The duo pointed out that the recent movements are a sign of a significant change in the structure of the stock market.
Pointing out that the European Central Bank is also preparing to raise interest rates, but the Fed will continue to run ahead, Ağaoğlu and Güldağ suggested that the strong dollar will adversely affect our foreign trade. Ağaoğlu emphasized that the main risk for Turkey would be the contraction in demand during interest rate hikes.
Guldag: The Central Bank played with reserve requirements again. It not only expanded the area to apply additional provisions, but also included companies as well as individuals in converting from foreign currency to TL. Since the currency-protected deposit is the backbone of the policy, it seems that it is not wanted to allow an escape from there. For this reason, it imposes new duties on banks.
Ağaoğlu: There are targets given to banks for KKM. Now, legal entities and companies have been added to individuals.
Guldag: It is not the bank’s direct duty to transfer to KKM or to ensure that it remains there, neither for individuals nor for legal entities. It’s the customer’s choice. However, the situation is tried to be managed by imposing obligations on the banks.
Ağaoğlu: Previously, a limitation was imposed on the commission that banks could receive, other than the interest rate. In summary, we have come to a period that distorts the pricing behavior, in other words, the application of “fixed price” in quotation marks.
Guldag: Narh was probably not intended. But when your focus is to control the currency and you are not allowed to touch the interest rate upwards, that’s where it gets…
Ağaoğlu: The Turkish economy cannot fit into this. When you aggravate the conditions at KKM, push harder and transfer the foreign currency to the Central Bank, the problem is not solved. If the Central Bank had not used them and increased the reserves, there would have been no problem. But he obviously uses it, and therefore there is no significant change in reserves.
Guldag: KKM 60-62 billion dollar arrived somewhere around. It seems that in this process, the amount of dollars given to the market in one way or another corresponds to almost the same amount. Now, what kind of autumn do you expect, keeping in mind the statement ‘we are now coming to the point where the fixed price is applied’? We’re in September…
Ağaoğlu: First, there are syndications. It will be extended again, but I think we talked about the collections will be in advance. Because I know this; There was no improvement in the perspectives of banks abroad towards Turkey, and the prices rose again compared to 1-1,5 months ago. They started to come to the libor + 6-8 region, which they offered for one year of financing. Around 12-13 with costs.
Guldag: As dollar…
Ağaoğlu: Yes, we are talking about dollars. That’s a very high number. Because there is no positive improvement in Turkey’s risk perception.
Guldag: If it’s hard for banks, it’s tough for Turkey. Just like the real sector…
Ağaoğlu: Everyone says the profits of banks are too high. It is not my place to defend the banks, but the profits of the banks are good. Because the total capital figure is growing, as long as that profit is not distributed… They can give higher loans according to their capital adequacy ratios. So they can finance growth or inflation. Otherwise, we will get smaller and we will have much more difficulty in finding credit than today. I’ve passed the restrictions that come with regulations. And indeed, due to a problem with the ratios of the banks, but since they do not enter this inflation accounting, they will pay a very high tax on their nominal profits. Currently, banks would not look so profitable if inflation accounting was included.
Guldag: When it comes to regulation, I think of papers that they will have to buy at new rates instead of inflation-indexed papers…
Ağaoğlu: There is such a situation, yes. They wrote profit from those papers. Banks are still demanding it, but you have to give collateral to the Central Bank in order to get the money whose interest rate is now 13. Either foreign currency or treasury bills must be guaranteed. The Central Bank has now said, in a literal sense, that I first reduced the rate of counting inflation-indexed papers as collateral to 70 percent, then to 50 percent. Again, banks keep them voluntarily, but this side use is limited. Limit regulation on interest rates also caused banks to demand fixed-rate bonds issued by the Treasury, ie bonds other than inflation-indexed ones, except for these inflation bonds. And there, too, there was a rapid decline in interest from 19 percent to 14 percent. In other words, banks are used in a mechanism that runs through the banking system instead of lending to the Treasury through the Central Bank or making direct advances.
Guldag: Yes, it seems…
Ağaoğlu: For this reason, it is tried to hit this loan mechanism, that is, 3-5 birds or even a flock of birds with one stone.
Guldag: Do you think it works? Or rather, is it sustainable?
Ağaoğlu: I always say that I have serious concerns. Currently, banks are required to buy bonds. They started to buy normal rate bonds except inflation bonds.
Guldag: This time, their income will decrease. This exchange Of course, it can also be effective. There is a climb in the stock market with banks…
Ağaoğlu: I actually attributed the rise in the stock market to some inflation. However, according to last week’s data, there is an entry of $800 million. This doesn’t seem very healthy to me. The rise of the banking sector, especially the public banks, and the stock market is a question mark for me. I even thought of posting a tweet like this; Presumably, bank managers call each other and ask, “What did we do so well that our stocks are performing so well?” Was there a mine in the banks and we didn’t notice?
Guldag: Of course, bank stocks remained quite low for a long time. A delayed recovery…
Ağaoğlu: Or goodwill. If there is an Iran deal, the pressure on Halkbank will decrease even if it does not lift. On the one hand, this comes to mind. But if inflation accounting comes into effect, as you have stated in the newspaper as a possibility with the bag law, of course we will not be able to see the current profit figures of the banks. We will see more realistic figures.
Guldag: That’s what I said can affect the stock market. Currently, a record is being broken in TL terms in the stock market, but we are far from the peak in dollar terms…
Ağaoğlu: I get the target 5.1 in dollar terms. Our stock market has reached that level three times in the past. Looking at it accordingly, are we behind that level today? Yes, we are behind. Do we have the potential to go higher? Yes there is. But I am a little confused in the question of “What is being done and steps are being taken to recapture the $5.1 level?” I look at the decisions in the last year and when I ask myself what kind of measures have been taken in Turkey’s competition with the world, which will pave the way for Turkish investors, Turkish businessmen, and make their lives easier in competition with the world, I can’t find many examples if you want to be honest.
Guldag: Rather than enlarging the cake, the question of how to enlarge the slice of cake that falls on me comes first…
Ağaoğlu: Almost all of the measures taken are domestic and the existing small closed, self-rotating economy measures.
Guldag: Of course, when you look at it that way, that $5.1 level in the stock market is the level of other conditions and environment. It is not an environment where the share of foreigners in the stock market has fallen to 30 percent.
Ağaoğlu: True, the foreign share in the stock market had increased to 70 percent. Now, 800 million dollars of foreign funding has arrived or saying that it was a compliment to our stock market from abroad and presenting it as if it were a big event seems a bit of a helpless consolation to me.
Guldag: Especially after the Jackson Hole meeting, it is seen that the Fed will continue to take firm steps on the interest rate, albeit ‘painful’, to fight inflation. While the level of 3-3.5 was spoken, now the interest rate is 4’s or even 5’s. economy has been reported in the press. This brought a drop in the world stock markets, but except for ours…
Ağaoğlu: The Istanbul stock market went in a completely different direction from the foreign stock markets. While the world stock markets are going down, commodity While prices are going down… Yes, it is an advantageous situation for Turkey in terms of foreign trade, but the rapid reflection of this on the stock market does not make much sense to me, and the sharp rise in our stock markets at a time when the American stock markets fell so hard tells me something.
Guldag: What is he saying?
Ağaoğlu: In an environment where foreign investors are scarce, there is a situation where Turks buy and sell stocks to Turks. Tehran, Egypt, Pakistan, I don’t know, the Argentine stock market is. They have their own world, a closed, self-scorched world order where there are no foreign investors, where locals buy and sell with each other. We have come to such a place, and the movements in the last few days have been quite a confirmation of this. Let’s record it as a small note. Güldağ: Small but important. Do you think this is a structural change? Ağaoğlu: In a sense, yes. I think the world of 5.1 in the stock market was another world. Güldağ: What about today’s world? Ağaoğlu: Today, we will be imprisoned in the world of 1 and a half to 2 and a half dollars for a while. We seem to be heading towards such a world.
Entering a more difficult process in energy
Guldag: The decisions of the Fed and the European Central Bank will determine the course of the pair. A 75 basis point ‘jumbo’ from Europe, which they call interest increase is expected, but it is clear that the Fed will continue to run ahead. The Euro/dollar pointer seems to be in favor of the dollar for a while. Our exporters are negatively affected by the strengthening of the dollar in a process where our purchases in dollars reach 70 percent and our sales in euros remain around 50 percent.
Ağaoğlu: It is true, but the shrinkage in demand during interest rate hikes is the biggest risk for us. There is a possibility of a weak euro shifting from the euro to the dollar side. I mentioned the 92.50, 94.50, 96.50 targets. The contraction in demand in Europe will reflect on us as a weakening in exports. On the bright side, there is a general decline in commodity prices. Gas prices fell sharply, but gas prices in Europe are experiencing high volatility. In order to bring prices down, countries are opening up their national reserves. This is not a good thing. If you open the reserve in August, what will you do in December, which reserve will you open?
Guldag: The next 6-8 will determine not only the course of this year, but perhaps a decade.
Ağaoğlu: There are 600-odd aircraft in the Russian fleet, mainly Boeing and Airbus. And they are deprived of the rights to spare parts and updates. The Russians began to ‘rob’ some of their planes and use them as spare parts for others. An aviation-related friend of mine said, “Iran has had this business for years, there is a strange black market in this business. They’ll get it somehow,” he says, but Russia seems to be stuck with new sanctions. On the other hand, if planes will not fly in Russia, what will Europe do if Russia does not give gas in winter? It’s a really difficult equation and process.
Guldag: The fact that an even more difficult process is being entered in energy leads to comments that the possibility of recession in Europe is also getting stronger. Oil prices are also looking for direction. Brent is back at $100 again…
Ağaoğlu: The important news is that Iran is about to enter the equation. We have entered the last 3-4 months, it seems to be over. A tiny bit of trouble in Libya brought oil back to $102 in a rush. For relief, Iran needs to enter the equation. After a rapid decline when it enters, I expect a stabilization at $95 again. But this is not the case for natural gas. Natural gas literally came between Putin’s lips.