December 3, 2010 / 2:20 PM / in 7 years

UPDATE 2-Turkey may mull steps against "hot money"-finmin

* Finance Minister says taxation an option

* Brazil-style ‘Tobin’ tax not viewed favourably by govt

* More monetary measures expected first

* Could build forex reserves to between $100-150 billion

(Adds fresh quotes, analysts comments, background)

By Simon Cameron-Moore and Orhan Coskun

ISTANBUL, Dec 3 (Reuters) - Turkey should discuss contingencies, including taxation, to curb portfolio inflows fuelling runaway asset prices, but no evaluations had taken place yet, Finance Minister Mehmet Simsek said on Friday.

Governments in Brazil, South Africa, Thailand and other emerging markets have directly or indirectly intervened in recent months to keep their currencies from strengthening.

Turkey had no plans at present to rein in such “hot money” inflows, but policymakers had options to review, Simsek told broadcaster CNBC-e in an interview.

“The government should discuss ‘hot money.’ As a principle, I am someone who believes we can’t just be observers to portfolio inflows at this time,” Simsek said.

“I believe that other measures can be taken, other measures including tax.... These can always be evaluated. But this is not the case now,” he said.

Investors have poured money into Turkish stocks, bonds and the lira this year, seeking higher-yielding markets after developed economies slashed interest rates.

“Steps will not be allowed which shock investors and cause them to flee Turkey,” a senior member of the ruling AK Party with knowledge of economic policy told Reuters.

“The entry of long-term capital into the country is something which we clearly prefer.”

So far, Turkey has used monetary levers to stop foreign speculators overheating its markets and making the lira currency become too strong.

“In Emerging Europe only Turkey and Poland really have to worry about this,” said David Oxley, emerging markets economist at Capital Economics in London.

With inflation falling there was little prospect for a hike in the main central bank policy rate through 2011, he said.

Analysts, expect Turkish policymakers to curb credit growth instead through further increases in the reserve requirements -- already back to levels seen before the global financial crisis struck in late 2008.


Analysts also foresaw further reductions in the overnight borrowing rate to dampen speculation on the lira appreciating, as the bulk of foreign money is parked in the money market.

The central bank, on Nov. 11, left its policy rate, the one week repo rate, unchanged but slashed its overnight borrowing rate by 400 points to encourage investors to hold lira deposits longer.

    The central bank also has stepped up purchases of foreign exchange at weekly auctions, and Prime Minister Tayyip Erdogan has said Turkey needs to build up its forex reserves.

    The AK Party official said reserves should be raised to a level of around $100-150 billion. As of Nov. 26 they stood just below $80 billion.

    Simon Quijano-Evans, analyst at C.A. Chevreux in Vienna, saw the central bank and government working well together to cool markets.

    “First of all they will try to manage expectations, and looking at equity prices and bond yield movements over the last couple of weeks they’ve done that and it has worked,” he said.

    Economy Minister Ali Babacan earlier this year expressed skepticism over the merits of Brazil’s “Tobin” tax. The Latin American giant has imposed levies on foreigners’ purchases of local bonds and stocks.

    A senior official in the ruling AK Party told Reuters that this option was not viewed positively, so the tax weapon appears unlikely to be used unless other methods fail.

    “Is it likely? It all depends on the continued flows,” Quijano-Evans, said. “It’s obviously a possibility.”

    The imposition of a withholding tax had caused the Turkish bond market to dry up a few years ago, and that experience will probably make policymakers reluctant to go that route, though Turkey is in better shape now.

    Turkey notched 11 percent growth year on year in the first half of 2010, making it one of the fastest growing economies globally, and the share market has boomed.

    While the lira is little changed against the dollar since the start of the year, Turkey’s main trading partner is Europe, and the lira has appreciated 10 percent against the euro, raising complaints from exporters.

    The main benchmark Istanbul index .XU100, which is 70 percent foreign owned, has gained 26.7 percent since the start of the year compared with a 12.6 percent increase in the MSCI benchmark index of emerging stocks .MSCIEF.

    Simsek also said the government’s 2010 budget deficit may be below 44 billion lira ($29.6 billion), a trend that could bode well for Turkey’s chances of getting a credit rating upgrade for its sovereign debt [ID:nLDE6A41BN]. The government has previously said it targets an end-year deficit of 44.2 billion lira. (Additional reporting by Ayla Jean Yackley; editing by Stephen Nisbet and Toby Chopra)

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