Turkey Moves to Tackle Credit Bubble, Capital Flows

Turkey’s central bank took measures to curb lending by banks and also cut the benchmark interest rate, signaling its determination to prevent a possible credit bubble and slow capital inflows.

The central bank in Ankara increased the reserve ratio for deposit and savings accounts of up to one month to 8 percent from 6 percent, it said in the Official Gazette today. The reserves decision was signaled yesterday as the bank lowered the benchmark one-week repo rate to 6.5 percent from 7 percent.

The government and central bank are concerned that banks are lending too much -- consumer borrowing has increased an average of 0.9 percent per week this year. The lending boom has helped bring economic growth of 8.9 percent in the first three quarters, more than four times the rate in Europe.

“They need to do things now to slow credit growth and stop the economy from overheating,” Christian Keller, chief economist for European emerging markets at Barclays Capital in London, said in a phone interview.

Turkey’s lira declined to a five month low, losing 1.9 percent to 1.5516 at 6:25 p.m. in Istanbul. Banks led a decline of 1.4 percent in the main ISE National 100 index. Yields on two year benchmark bonds rose 14 basis points to 7.44 percent.

The central bank also raised minimum monthly payments on credit cards to between 25 percent and 40 percent of outstanding debt from a previous 20 percent. Meanwhile the banking regulator in Ankara said it will police mortgage lending more stringently.

Banks May Suffer

Turkiye Vakiflar Bankasi TAO, which will need to set aside extra provisions worth about 5 percent of estimated profit next year because of the higher reserve requirements, and Turkiye Is Bankasi AS will be among the worst-hit banks, Istanbul-based broker Ekspres Invest said in an e-mailed report. Vakifbank dropped 3.3 percent to 3.77 liras and Isbank 2.9 percent to 5.34 liras.

The reserve requirement declines to 7 percent for deposits with a term of one to six months, 6 percent for those up to a year and 5 percent for longer than a year. The ratio was set at 8 percent for liabilities other than deposits. It was previously 6 percent for all lira liabilities.

The banking regulator will appoint independent surveyors to ensure properties are valued correctly, helping to prevent a bubble in the market, an official at its office in Ankara said on the usual condition of anonymity. Houses in Turkey are sometimes overvalued during a mortgage application, meaning the maximum 75 percent of the property’s value banks can lend as a mortgage may actually cover the whole of the purchase price, requiring no deposit to be paid.

Lower rates and higher reserve requirements may also help restrain the current-account deficit, which has soared as capital inflows strengthen the lira and stronger domestic demand pulls in more goods from abroad, central bank deputy governor Erdem Basci wrote last weekend. The gap widened to $40.8 billion, or about 5.6 percent of GDP, in the 12 months to October as imports surged and export growth slowed.

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