CBT expounds on fund flows; this time in greater detail... Data flow regarding the financing of the current account deficit within Nov’10-Jan’11 was not consistent with the trend in the TRL, which in the same period remained under heavy pressure against major currencies, depreciating almost 12%. Indeed, there were no significant outflows from the conventional portfolio channels that the balance of payments could cover. Furthermore, net errors & omissions item showed US$5.7bn inflow over the last three months. Although this item represents flows that cannot be recorded in finance accounts and is calculated as a residual, it is usually considered hot money. Consequently, several articles appeared in the local press, claiming that the Central Bank of Turkey’s new policy mix that was aimed at deterring short-term capital flows to Turkey had proved ineffective, defying claims by the Bank. The CBT promptly responded in a press statement: “...Following resolutions adopted by the Central Bank of Turkey Monetary Policy Committee during and after the November 2010 meeting, such as widening of the interest rate corridor and cuts in policy rates, some outflows of short-term funds have been noted. Based on the CBT’s calculations, cumulative outflows from Turkish markets have exceeded US$10bn in between the MPC meeting held in November and the end of December. Short-term fund outflows are noted to be mainly the result of the closure of money market positions of the non-residents, in the form of swaps, deposits, repos and credit transactions. Although these transactions are reflected to balance of payment (BoP) statistics, swap transactions in particular, which constitute the bulk of the money market positions, cannot be monitored via BoP statistics. On the other hand, since the beginning of 2011, the CBT has been observing daily fluctuations in non-resident portfolio volumes, driven by global risk perceptions and international developments. The CBT has also acknowledged a shift in non-residents’ positions within November 2010 – Feb 2011 in favour of longer maturities, mainly through accumulation of domestic debt instruments...” However, this explanation apparently failed to convincingly rebut the counter-arguments, as the CBT had not backed its statement with concrete evidence on money market positions. As such, a few days later, the monetary authority had to elaborate on fund flows in more detail and to support its case this time with figures.
Where are hot money flows headed to and how to monitor them? -- First, the CBT specified three channels for non-residents’ portfolio flows: equities, debt instruments, and money market transactions. As we all know, the first two channels can be easily monitored from the CBT’s database (Non-residents' Holdings of Securities) on a weekly basis and from BoP statistics on a monthly basis. However, as mentioned in the above statement as well, swap transactions in particular, which constitute the bulk -- and are the most volatile component -- of the money market positions, cannot be monitored via BoP statistics. Secondly, a major difference from the previous statement was the indication provided by the CBT to monitor such flows. The CBT pointed out that the off-balance sheet FX position of the banking system could be an important indicator of the magnitude of these transactions. Developments on the off-balance sheet FX position of the banking system can be monitored through the weekly bulletins of the Banking Regulation and Supervision Agency. Unlike many others, we have been aware of these figures and have been following their evolution for many years now to better comprehend the TRL’s performance amid hectic market conditions. Let us explain here what off-balance sheet FX position stands for and what its implications are for the TRL.
As is known, since Turkey switched to the floating exchange rate regime in 2001, the banking sector’s net open F/X position has been close to zero, while there is even a surplus, according to the latest data. On the other hand, banks are offsetting their on-balance sheet open position at US$12.3bn as of March 4, by taking long positions via off-balance sheet transactions (derivatives) of similar amounts. Swaps with foreign residents are known to be making up a major portion (60%) of the off-balance-sheet transactions and 75% of these derivative transactions were on currency, according to the September 2010 issue of the FX Risk Evaluation Report of the BRSA. Currency swaps include the exchange of the TRL and major currencies between domestic banks and foreign investors. It provides foreign investors the opportunity to take TRL positions without assuming the country risk. Especially, long term swaps had been used to hedge long-term domestic housing loans during 2005-06 by our local banks.
Implications for the TRL -- So how can we interpret a change in the off-balance sheet FX position? Simple… When there is an increase (decrease) in the off-balance position, it eventually means a rise (fall) in money market positions in the TRL by foreigners. It also places appreciation (depreciation) pressure on the domestic currency.
Let us continue with the November-December evolution of these figures. Moreover, we will be looking at recent numbers to evaluate the current outlook of short-term capital flows. According to the BRSA’s weekly data, off-balance sheet FX position fell by US$10.5bn within the Nov 12 – Dec 31, 2010 period, lending support to the CBT’s argument on hot money outflows and the effectiveness of the decisions.
Although the direction of the flows has changed more often year-to-date in 2011, there have still been outflows of around US$1.3bn cumulatively as of March 4. As a result, total money market outflows have reached US$11.5bn since the beginning of November. However, there have been US$7.2bn inflows to domestic debt instruments in the same period, mostly during the first months of 2011, and US$1.9bn outflows from equity portfolios. Central Bank Governor Yilmaz also acknowledged this, saying that following their statement concerning “US$10 billion worth of outflows”, "a majority" of those positions had returned. But much of the returning money appeared to be invested in longer term instruments, which was their main goal.
Note that the above analysis has a certain margin of error, since the data are not compiled through conventional investment channels. Nevertheless, we think it is a valuable exercise to understand the recent trends.
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