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Turkey Gold Beats Banks as Erdogan Fights Inflation Worries

Turkish Prime Minister Recep Tayyip Erdogan is struggling to persuade fellow Turks that their banks are as good as gold.

For every Turk who saved in a deposit account last year, three opted for gold or cash, a December MasterIndex survey showed. Those who deposit their lira at banks refuse to do so for more than a few months, according to the survey commissioned by MasterCard Worldwide.

Failure to align deposits with increasingly long maturities of bank loans may put banks at risk, marring Erdogan’s nine years of record economic growth and market performance. Inflation slowed to 4.2 percent in February from about 70 percent in 2002, the year Erdogan’s party came to power.

“It’s hard to change ingrained behavior and Turks like to remain liquid,” said Michael Gomez, co-head of emerging markets at Pimco, manager of the world’s biggest bond fund, in a telephone interview from Munich. “One would be remiss not to pay attention to depositor behavior. They have been through many cycles.”

It’s getting worse. The average maturity of lira bank deposits fell to 1.7 months in 2010, from 2.8 months in 2002, when Erdogan, who’s seeking re-election June 12, first came to office, according to Turkish central bank data.

Decades of Instability

Erdogan said today he’s trying convince 74 million Turks that he has put an end to decades of instability. Prior to his two-term-old administration, the average government lasted 16 months, he told an audience at Bloomberg in London.

“What we’ve brought is stability and I’ve always told people that they have to become accustomed to it,” Erdogan said. The investment the country draws is proof that executives outside Turkey can see the change, he said.

The median age here is 29, and even people that young have already survived military rule, a succession of failed coalitions, an overnight currency devaluation, a banking crisis, a 1999 earthquake that killed 17,000 people and inflation that peaked at 130 percent in January 1995.

“This is a generation who lived through extremely high, chronic and volatile inflation, without knowing what interest rates would be even a week ahead,” said Eli Koen, the co-head of emerging Europe equities at Union Bancaire Privee in London and manager of $65 million in the Turkish Equity fund. He says Turkish banks are an “exciting long-term growth opportunity.” Turkish authorities are “absolutely right” to try to shift the maturity structure, he said.

Financial Crisis

In 1987, 51 percent of deposits were less than a year in maturity, according to the Banks Association of Turkey. It was 90 percent by the end of 2010. A 2001 financial crisis drove 20 lenders into receivership and forced a bailout whose cost to the country ended up being $160 billion, Deputy Prime Minister Ali Babacan, who leads economic policy, said on Feb. 21.

The aftermath of that crisis helped bring Erdogan to office, pledging balanced budgets and progress toward European Union membership.

Now, the 57-year-old prime minister needs to convince Turks of what investors are indicating: that decades of financial instability are over. Erdogan, who as a boy sold pastries by the roadside in Istanbul’s Kasimpasa district, is aiming for a third term. If victorious, he could become the country’s longest- serving leader since competitive voting began in 1950.

New Constitution

He’s campaigning on the promise of a new constitution, the first not prepared under military rule, and a record of economic growth that puts Turkey closer to meeting the standards for euro membership than many of the 17 countries that belong to it. Turkey’s ratio of debt to gross domestic product fell below the euro’s criterion of 60 percent in 2004; this year’s budget deficit goal is 2.8 percent of GDP, below the 3 percent target.

The economy expanded 8.9 percent in 2010, according to figures from the state statistics agency in Ankara today.

Since Erdogan took office, the main ISE National-100 share index has quadrupled in dollar terms, outperforming the MSCI Emerging Market Index. GDP per person has almost tripled, to $10,043 in 2010, according to the Treasury. A 2005 currency overhaul stripped six zeroes from the inflation-ravaged lira.

Over the same period, the maturity of government borrowing has extended to 57 months from 9 months and the average term of bank loans has lengthened. The result of shortening deposit maturities is a widening mismatch between the terms at which banks borrow and lend, which “constitutes a risk to the stability of the system,” according to a December 2010 central bank report on financial risks.

Longer Deposits

In a bid to get Turks to make longer deposits, central bank Governor Durmus Yilmaz as recently as March 10 sponsored a conference on Financial Education and Awareness. Success would strengthen the banking industry, including Akbank TAS (AKBNK), the lender part-owned by Citigroup Inc., spur growth and reduce Turkey’s reliance on external financing.

Extending maturities is “part of what we have been doing,” Yilmaz said in an interview on March 15. Longer savings maturities “means more long-term funding for the banks and that’s good for the overall economy.”

Bulent Gedikli, one of Erdogan’s financial advisers, on Jan. 30 called on the 32,000 people who control half of about 587 billion liras ($378 billion) in deposits to lead the way in extending maturities.

‘Change in Fundamentals’

“Turks find it harder than foreigners to see the change in fundamentals,” said Cevdet Akcay, chief economist for Yapi & Kredi Bankasi AS, the lender part-owned by Italy’s UniCredit SpA. “Turks are slowly starting to believe that the lira is a credible currency. Believing in it as a long-term investment tool will take longer.”

With the benchmark interest rate at a historic low of 6.25 percent, the central bank is encouraging banks to offer more interest on longer deposits. Yilmaz on March 23 raised the reserves banks must set aside against liabilities such as deposits for the third time in four months. He’s penalized short-term deposits more than long-term, opening up a spread for the first time.

The reserve rate varies from 15 percent for immediate- access accounts to 5 percent for savings accounts of over a year. At Turkiye Is Bankasi (ISCTR) AS, the lender with the most deposits of non-state banks in September, according to the Banks Association of Turkey, savers can earn 8 percent on yearlong deposits and 6.75 percent on those for one month.

Credit Rating

Moody’s Investors Services rates Turkish credit Ba2, two notches below investment grade, with a positive outlook. Standard & Poor’s rates the country an equivalent BB, also with a positive outlook.

Still, the 2001 crisis was only a decade ago. “Anyone on the street now with money to save remembers the overnight devaluation, the political rows that sparked financial crises, and most importantly, triple digit inflation,” said Mehmet Demiray, managing partner at Virtua Arastirma, an Istanbul-based polling company. “It’s no surprise they think short-term and steer toward investments that are as liquid and convertible as possible.”

That Turks avoid long-term bank deposits doesn’t signal a mistrust of the financial industry, according to the Banks Association of Turkey. It’s a sign that “financial stability hasn’t yet been enough to change customer habits,” it said in response to e-mailed questions from Bloomberg News.

‘Limited Deposits’

Customers can dictate terms because “banks compete fiercely both on price and maturity to draw limited deposits,” it said. Additionally, many depositors roll over one-month accounts for years, so that “while maturities are short, the time they spend with banks is much longer. This prevents a strong economic incentive for banks to lengthen maturities.”

Banks aren’t only competing with each other for savings. They also face strong rivalry from gold, foreign currency and real estate. Those investments are seen as safer and higher yielding, according to Zeynep Copur, an associate professor at Hacettepe University in Ankara who’s studied savings habits among families in the capital.

“Families want to feel secure and opt for instruments that can be immediately converted into cash,” she said.

Islamic lender Kuveyt Turk Katilim Bankasi AS on March 22 opened the first of 180 automated teller machines through which it will sell gold coins.

“If I had anything to invest it’d be gold,” said Meric Bada, a 24-year-old selling half-kilo bags of roasted chestnuts from a barrow in a central Ankara park. “Banks just don’t provide the kind of return that gold does.”

Earn Interest

It’s not just gold that banks are competing with. Some Turkish Muslims prefer not to earn interest at all and instead invest their savings in profit-sharing arrangements with local businessmen, according to Virtua’s Demiray.

Nebahat Akpan, a headscarved 36-year-old mother of one boy, said she’d removed the 80,000 liras from the sale of a family minibus from the bank as soon as possible. “For religious reasons I can’t leech off interest,” she said.

Instead, she bought an apartment and hopes to earn about 380 liras a month in rent, an annual return, excluding capital gains, of about 5.7 percent.

“That’s money I can use each month,” she said.

The obstacle to longer-term savings “is that people have become accustomed to doing business in a certain way,” according to Vedat Akgiray, head of the Capital Markets Board. “We have to change it. That’s it, there’s nothing more.”

To contact the reporter on this story: Steve Bryant in Ankara at sbryant5@bloomberg.net.

To contact the editor responsible for this story: Andrew J. Barden at barden@bloomberg.net.

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