Erdem Başçı, central banker of the year

The Banker, a monthly financial affairs publication founded in 1926 by the Financial Times, each year elects the central bank governors on each continent who display remarkable success in executing their jobs. The Banker also designates one of these successful governors as the “primus inter pares” (first among peers). This year the primus is Başçı, who at the same time has also been nominated as the best governor in Europe.

Başçı was appointed governor of the central bank in April 2011. He had served as deputy governor of the bank since October 2003.

Başçı, born in Ankara in 1966, is rather a young central bank governor. In fact, he could have taken command of the central bank five years earlier when the Justice and Development Party (AK Party) government decided to nominate him as governor. However, he was vetoed by President Ahmet Necdet Sezer back then.

The reason has never been officially revealed but it is not very difficult to guess; Turkish-style “ideological” suspicion would be a good guess, I think. This magazine award accorded Başçı is certainly an accolade to the central bank’s new policies, which had provoked a hot debate in Turkey and abroad when they were implemented at the end of 2010. Following this implementation, a campaign of persistent criticism was launched asserting that “these policies are dangerously experimental.”

I had recently chosen my side in this highly controversial issue supporting the central bank’s new policies. In my column of Dec. 24, 2012 (‘Confusing’ policies of the Turkish Central Bank) I was defending the courage of the central bank management, who were not only obliged to fight inflation, but simultaneously had to address other problems such as the dangerous expansion of banking credit, an unsustainable current account deficit and pressures emanating from speculative capital inflows. So, the central bank shouldered the responsibility of tackling the worsening imbalances. To do this, it designed new policy tools, namely the “interest rate corridor” and the “reserve option mechanism.”

The interest rate corridor aimed to produce a discreet uncertainty about money market interest rates in order to discourage speculative capital flows, while the reserve option mechanism contributed to the stabilization of the hard currency market without central bank intervention since it allowed banks to hold part of their reserve requirements in US dollar and euros.

This is what exactly validated The Banker’s choice of Başçı. Quoting Başçı, The Banker supported his approach to the current problems: “The central bank had moved ahead of other emerging markets to adopt experimental measures designed to curb hot money inflows while maintaining a free-floating currency regime. … The central bank also created a corridor around its policy rate. This meant that high inflows led to an even lower return, further discouraging foreign money seeking yield. …More recently, the bank adopted a reserve options mechanism (ROM). This new mechanism has increased the flexibility of Turkish monetary policy and also works as an automatic stabilizer in face of the short-term capital flows to Turkey.” According to The Banker, “The result, at least so far, is a soft landing for Turkey rather than the boom and bust scenario that was threatening to unfold.”

So far so good for Başçı, but nevertheless it is too early to declare victory. As I noted in my column cited above, the economic growth rate was down to 3 percent in 2012, which was much lower than expected, causing a surge in unemployment. Now, the central bank is facing a double challenge: Preserve macroeconomic stability via the stability of the real exchange rate as well as a controlled revival of domestic demand, which aims to increase the growth rate without jeopardizing the disinflation in progress, as well as the rebalancing process regarding the current account deficit. This task will certainly not be easy. I am afraid that an undesirable tradeoff between these multiple goals will be unavoidable in 2013. Advanced indicators show that we will probably be obliged to forget the rebalancing process. I do not think that net exports will continue to contribute positively to economic growth this year. Domestic demand has started to increase, but at the same time imports have also started to increase more than exports. Let’s see if The Banker will select Mr. Başçı a second time.