The medium-term programme, which is expected to be unveiled in conjunction with the 2012 draft budget by October 17 the latest -- the latter as per a constitutional requirement -- is keenly anticipated by market players. Key aspects of the programme that are eagerly awaited are the macro framework to be presented for the 2012-2014 period and measures to be adopted to prompt structural improvements in the C/A deficit, as well as budget targets that will help us gauge the role accorded to public savings in this process. Issuing this report ahead of these crucial disclosures, we aim to provide investors with an insight into where Turkey stands from a fiscal balances perspective and -- making use of the IMF’s recently issued ”Fiscal Monitor” study -- make an assessment of the status quo with a global perspective. This way, once budget targets for the coming years are announced, we aim to be ready to figure out what they represent from a fiscal stance standpoint.
Global perspective: Turkey compares favourably with global peers in terms of key budget performance indicators; yet... Starting our analysis with the global comparison, we infer from last week’s IMF data, disregarding minor differences in definition, that Turkey ranks highly favourably on the basis of the 2011 values of the “general government balance (% of GDP)” and the “general government primary balance (% of GDP)”. While the respective values for Turkey are -0.9% and 1.8%, the global averages are -5.0% and -3.0%, and the comparison does not change when conducted on the basis of developed or emerging countries. Nor does Turkey’s comparative ranking change when the budget is adjusted for cyclical effects. With respective values of -2.1% and 0.6%, Turkey still stands well above comparable global averages of -4.1% and -2.2%.
...actual budget balances need to be cyclically adjusted... It is worth underlining that actual budget balances are imperfect indicators for assessing public finances and fiscal policies, since they are influenced by a number of factors that are both transitory and beyond the direct control of fiscal authorities. Predominant among those are the fluctuations in economic activity. The indicators of cyclically-adjusted budget balances seek to correct the fiscal outcomes for the effects of cyclical variations. In other words, they aim to determine what the budget balance would have been if the economy were on its “normal” growth path; i.e. characterised by roughly constant increases in output over the medium-term.
The IMF method... A number of different methods could be used for this adjustment process, out of which we have opted for the IMF method cited in Regional Economic Outlook 2006, for the sake of simplicity and convenience.
With this analysis, we aim to discern the nature of the fiscal stance (pro- or counter-cyclical) pursued in recent years and whether a fiscal impulse has been utilised. To this end, we have implemented the IMF’s methodology for fiscal impulse calculations, developed by Abrego and Clements. According to this methodology, fiscal impulse is the change in fiscal stance between two consecutive years, which in turn is calculated as the difference between the actual and cyclically neutral fiscal balance. Implementation of an expansionary (contractionary) fiscal policy in times of economic contraction (expansion) points to the presence of a counter-cyclical fiscal policy. On the contrary, implementation of a contractionary (expansionary) fiscal policy in times of economic contraction (expansion) indicates that the fiscal policy is pro-cyclical. The details of the methodology are presented below (Annex)
Our assumptions... Before proceeding to the findings of our study, we find it worthwhile to lay out a few key aspects of our assumptions. Similar to the IMF’s methodological approach, we assumed Turkey’s potential growth rate as its average growth rate for the past 20 years; i.e. 4%. Moreover, as the base year for our calculations, we opted for the year 2007, which preceded the inception of the effects of the global crisis, and we assumed that in that year there was no output gap; i.e. nominal GDP was equal to potential GDP.
While computing the “primary balance to GDP” ratios on an annual basis using current GDP data and budget primary balance realisations, we also aimed to calculate the cyclically-adjusted “primary balance to GDP” ratios, employing the potential GDP level. As with the IMF method, to compute cyclically-adjusted revenues, we multiplied the base year “revenues/GDP” ratio with the actual GDP level of each year, and to estimate cyclically-adjusted primary expenditures, we multiplied the base year expenditures/GDP ratio with the potential GDP level of each year. Hence, the difference between cyclically-adjusted revenues and primary expenditures provides the “cyclically-adjusted primary balance to GDP”, and the difference between the latter and the “actual primary balance to GDP” reflects the fiscal stance of a given year. A positive difference would indicate an expansionary fiscal policy. The difference in “fiscal stance” in between two consecutive years would tell us whether and to what extent “fiscal impulse” was applied.
Our findings... As is evident from the table below, while the fiscal stance is found neutral in 2008, the 1.7% value computed for 2009, when fiscal measures were adopted to assuage the effects of the global crisis, unsurprisingly points to an expansionary fiscal policy for the year. The 1.9% value computed for 2010, on the other hand, indicates that although the effects of the crisis have dissipated, fiscal policy still remains expansionary and that despite growth having reached 9%, “fiscal impulse” has been used, albeit to a limited degree. However, in a year whereby the C/A deficit to GDP ratio deteriorated markedly, at least a “neutral” fiscal stance would have been a more appropriate choice, in our view.
It seems somewhat premature to make an assessment of the year 2011 from a fiscal stance standpoint. This is because the current performance is ahead of the fundamental aggregates such as growth and inflation foreseen in the macro framework of the medium-term programme for the year 2011. Moreover, the budgetary effects of the restructuring of public receivables are perceived to have become sizable. According to our estimations, based on a growth forecast of around 6%, the neutral primary balance to GDP level for the year 2011 would be 3.1%. We should note that each 0.5bp growth overshoot would prompt a 0.1bp upward shift in this balance level. While the 12-month primary surplus/GDP ratio as of August stands at 1.8%, the 2011 primary surplus target of 1.1% appears bound to be revised upwards. Hence, while a level below 3.1% for the actual primary balance to GDP ratio by the year-end would imply the usage of an expansionary fiscal policy in the year 2011, a difference of at most 1.9% between the neutral primary balance to GDP ratio and the actual primary balance to GDP ratio would make us conclude that at least no “fiscal impulse” has been applied.
Undoubtedly, how the TRL13.5bn revenues projected for the current year from the public receivables restructuring plan (1% of the GDP) or the improvement in primary expenditures (whose magnitude we are unable to precisely estimate at this point) via a reduction in budgetary transfers through social security institution (SGK) premium collections are included in the analysis are also crucial. (The plan in question envisages additional revenue collections of TRL10.3bn (2012); TRL8.6bn (2013); TRL3.1bn (2014); and TRL1.0bn (2015)). While such revenues, given their one-off nature, might be excluded from the scope of the analysis to reveal the actual performance, conversely they might be maintained on the premise that they amount to the depletion of an accumulated receivable inventory. For example, in the programme defined data issued for the budget, the Treasury Undersecretariat makes adjustments for one-off items such as privatisations and public banks’ profit transfers, while making no adjustments for related collections. Moreover, the delivery of tax and premium payments to the Finance Ministry and the SGK initially has a contractionary effect on household disposable income and hence in this way amounts to a contractionary fiscal policy. Eventually, this effect is neutralised based on the extent to which these additional revenues are transformed into expenditures.
Conclusion: Cyclical variations paramount for a realistic assessment of fiscal framework... Turkey is one of the few countries to have implemented exit strategies from expansionary fiscal policies in the aftermath of the global crisis. This has helped Turkey rank favourably on a global scale in terms of fiscal balances and indebtedness indicators. However, adjusting for the cyclical variations induced by high growth, the resulting picture indicates that in fact expansionary fiscal policies have not been completely discontinued, and that fiscal impulse remained in use in 2010, albeit to a minor degree. While this stance observed in the past two years has failed to stem the deterioration in the C/A deficit, it has also narrowed the manoeuvring space for counter-cyclical fiscal policies. Hence, we believe it would be appropriate to evaluate the fiscal framework to be laid out in the medium-term programme not solely on the basis of budget targets, but with an approach that takes cyclical variations into consideration, and hope our study would help investors to this end.
Annex: Methodology for Fiscal Impulse Calculations The fiscal impulse is calculated as the change in the fiscal stance between two consecutive years, which in turn is calculated as the difference between the actual and a cyclically neutral fiscal balance. The first step in the process is to estimate the fiscal stance:
FS = (T – G) – (T* – G*) (1)
where T and G refer to actual revenues and expenditures in the current year, and T* and G* to cyclically neutral revenues and expenditures (all as a share of GDP). T* and G* are from a base year when actual output was at its potential, with two additional assumptions: (i) T* remains constant and (ii) G* remains constant only as long as actual growth equals potential growth. In the case that actual growth is greater than (less than) potential growth, G* falls (rises). For the present exercise, potential GDP growth was assumed to be the average annual growth rate over the past 20 years.
The fiscal impulse is the change in the fiscal stance in (1), multiplied by negative one (to indicate that a weakening of the fiscal stance imparts a positive fiscal impulse):
FI = (ΔG – ΔG*) – (ΔT– ΔT*) (2)
The first term in the fiscal impulse captures an increase in the spending to GDP ratio above what would occur if spending rose at the rate of potential output. The second term is equivalent to the change in the revenue to GDP ratio, since by assumption T* is held constant. Thus, the fiscal impulse, on the revenue side, simply reflects changes in actual ratio of revenue to GDP.
Source: IMF, Regional Economic Outlook: Western Hemisphere, November 2006
29 Eylül 2011 Perşembe
16 Eylül 2011 Cuma
Interventionistas
The scheduled August MPC meeting could be an opportunity to revert to a wait-and-see mode, while monitoring critical events concerning EU debt problems… The interim MPC meeting on August 4, along with the decisions taken then and later would normally have rendered the scheduled August MPC meeting a non-event. However, stability still remains elusive, with financial markets largely prone to event risk. Moreover, our Central Bank is shy of pronouncing a clear outlook for inflation and growth; rather, they opt for presenting two alternative global scenarios, given the elevated uncertainty, and clearly aim to buy time to make healthier decisions, going forward. In our view, the pre-emptive u-turn in monetary policy has been presented as a means of containing the downside risks for our economy, given the state of the global economy, but it was purely a verbal intervention to the growth perceptions of market players. Therefore, the CBT’s view still has to be tested with macro data, while it seems that the intervention has served to temper growth expectations. This is seemingly helping the CBT set the playing field, as overheating arguments and C/A concerns might be taking a back seat.
The CBT, guiding for its next monetary policy moves, has become markedly vocal on the value of the TRL against hard currencies, in a bid to engineer a soft landing... In order to predict the next move, we should know the scenario to which the CBT is currently attaching greater weight. In the first scenario, in case of concrete and satisfactory solutions to recent European debt problems, the CBT expects a rapid appreciation of the TRL, along with commodity price increases. In the framework of this scenario, the CBT would have to keep the RRR high and the policy rate low, in order to avert hot money inflows. Moreover, tighter measures to curb loan growth, such as a marginal reserve requirement, speed limit to borrowings, and restrictions to leverage ratios would be necessary. In the second scenario, featuring a delayed and dissatisfactory solution to recent problems, the CBT expects further TRL depreciation and envisages greater risk of a recession. Therefore, the RRR on TRL liabilities might be reduced gradually or aggressively, depending on the extent of the slowdown in that scenario. However, in both scenarios, the CBT leaves the door open for measured policy rate cuts, while underscoring that this would not necessarily be in the form of a series of rate cuts. On the other hand, at his recent interviews in some local TV channels, CBT Governor Basci sounded more hopeful about a resolution to EU debt problems: probably the mood change was related to the FOMC meeting dated August 9, where the FED expressed a commitment to hold FED funds rate at current low levels at least till mid-2013, while opening the door to QE3, as well as ECB secondary debt market buying Italian and Spanish bonds. However, the MPC is likely to remain cautious about the repercussions of financial shocks for the domestic economy, until it gets clearer signs of an improvement. For the time being, this would imply that the CBT still ascribes a higher possibility to the second scenario, as the root causes of global jitters -- record high Italian and Spanish yields -- were the sole trigger for the interim meeting, although the CBT Governor sounded otherwise recently. However, we think the current slight tendency in favour of the latter scenario is conditional and susceptible to data and event evolution.
Accumulating downside risks could trigger more drastic downward revisions… Globally and locally, growth view will hinge largely on short-term economic activity, domestic demand, and leading indicators, going forward, since downside risks are accumulating, as recent macro data releases have generally produced negative surprises. More importantly, this could trigger significant downward revisions to GDP forecasts and confirm the recent trend in stock markets.
Consecutive slumps in stock indices and the sharp retreat in bond yields prompt the perception that, more than a slowdown scenario, it is the scenario of a recession in the global economy that is being priced in... The foremost -- and as yet perhaps the single -- factor to support this perception to date is a key leading indicator, the Purchasing Managers Index (PMI), which has edged closer to the critical 50 threshold, considered to separate economic growth from contraction phases. Past data suggest that nearly each time that the index in question has dipped clearly below the 50 mark (levels at and below 45); an episode of economic contraction has ensued. Moreover, as growth has failed to gather adequate momentum despite quantitative easing programmes launched in developed economies and bail-out packages aimed at debt-stricken countries, overall sentiment has faltered, undermining hopes as to the effectiveness of potential additional measures. In case of a lack of developments to assuage these concerns and the persistence of risk aversion, we could evidence more dramatic declines in consumer and real sector confidence, and the risk of a negative feedback loop could increase notably. While such risks have started to become factored into market prices, they are yet to be duly reflected to economic forecasts. Such changes in global economic outlook will clearly have adverse ramifications for the Turkish economy, though the extent of the impact remains critical. Given the marked uncertainties concerning global economic outlook at this stage, we have opted for a scenario-based approach to come up with estimates for economic and financial aggregates for the near future. With this purpose, while maintaining our estimates in the framework of our baseline scenario for 2011-2012 despite accumulating downside risks, we add two further scenarios: i) “soft landing”; ii) “mild recession”. The scenarios include our estimates regarding the values other economic and financial indicators may take on the basis of quarterly and annual projections for GDP growth until YE12. Whilst forming our GDP estimates, we made assumptions regarding qoq changes in seasonally-adjusted GDP data, the primary indicator for the growth trend. For example, we assumed in the framework of our baseline scenario that there would be no change in growth in 2Q11 vis-à-vis the prior quarter of the year; that sub-potential growth would be registered in the subsequent three quarters (0.5%, 0.9% and 0.8%); and that once again above-potential growth would be recorded in the remaining three quarters (1.8%, 2.1% and 1.2%) until YE12. In this respect, our GDP growth estimates for 2011 and 2012 are 6% and 4.5%, respectively.
Our more negative alternative scenarios include our estimates as to the values growth rate may take in case of a series of flat/declining seasonally-adjusted quarterly GDP readings. In both scenarios, while the 2011 growth rate does not change substantially with respect to the baseline scenario, the effect is evidenced most notably on the 2012 growth rate. Even in the soft landing scenario, annual GDP change becomes 2.5%, undershooting the 4.5-5.0% range considered as the potential growth rate for the Turkish economy. This notwithstanding, even in the worst-case scenario that we envisage at this point, we do not expect the Turkish economic growth to slip to negative territory; i.e. contract, on an annual basis in 2012, even though we do not rule out quarterly contractions (Table 1). Our opinion is underpinned by technical, as well as fundamental reasons. The technical reason is that, the slowdown, which has deepened due to negative shocks, is poised to show its impact as of the latter half of the year, and this factor will diffuse the deceleration in growth to a two-year time frame. The fundamental reasons, on the other hand, are key factors such as the absolute and comparative relief provided by Turkey’s indebtedness indicators, and the soundness of the banking system, as well as the ability of the Central Bank and the government to resort to counter-cyclical monetary and fiscal policy moves in case of necessity.
Moreover, the CBT’s guidance on growth was not very negative for 2H11. Governor Basci pointed out that qoq changes in seasonally-adjusted GDP would be flat in 2Q and would be slightly positive in the remaining quarters. In other words, the CBT’s projections were not much different from our base-case scenario. However, they probably see downside risk to their forecasts, especially for 3Q and 4Q, since the measures adopted on August 4 have been presented as a means of containing the downside risks for our economy. As technical recession occurs when the level of real gross domestic product (sa) declines over two successive quarters, the CBT will consider this risk seriously and act accordingly. Let us remind you that even in the Eurozone, the epicentre of global financial tensions, GDP growth showed a positive, albeit small, change in 2Q.
All in all, given the limited time frame since the interim meeting and the persisting uncertainties regarding global economic outlook, we think the CBT should return to a wait-and-see mode to monitor the critical events related to EU debt problems. Given that the President of the European Council is assigned to make concrete proposals (to improve working methods and enhance crisis management) by October the earliest, we do not expect any rapid solutions in the near future. Therefore, the CBT is likely to tend more towards the pessimistic scenario; thus looks set to maintain an “easing” bias. However, this does not necessarily mean an imminent further easing at the scheduled August meeting. Although, we do not rule out another measured (25bp) policy rate cut, this is not our central view. Nor do we expect an RRR cut on TRL liabilities for the time being. Please note that even in our base-case scenario, we foresee around 200bp cut in RRR on TRL liabilities till the year-end.
The TRL may benefit in the short-term from a pause in easing, but this would be temporary, since the “easing” bias appears poised to be maintained. Hence, there will be a need for further verbal interventions (Governor Basci said they reckon the TRL basket should be 5-10% lower) and prevailing facilities (regular FX selling auctions, decrease in RRR on FX liabilities, US$10.8bn CBT FX deposit facility to banks) providing FX liquidity. Furthermore, the CBT could leave its FX selling unsterilized, meaning not compensate for TRL liquidity withdrawal and let the secondary market repo rates climb to the upper (PD at 8 %) limit to support the TRL against hard currencies. Other key factors to support the TRL might be 1) The 27% depreciation of the TRL against EM averages (Graph 3) since the beginning of 2010 on the heels of the CBT’s new monetary policy implementation; 2) The CPI-based real effective exchange rate index slipping remarkably below its long term averages, and becoming only 10% overvalued against the index with base-year 2003 (Graph 4). (REER against EM countries 8.6% undervalued, REER against Developed countries 18% overvalued, PPI-based REER 6.8% overvalued and unit labour cost based REER 20% overvalued) You might notice that none of the official indexes other than the REER against EM supports the Governor’s argument about the TRL’s undervaluation.
On the rates, we still see a downside potential for the benchmark bond yield, despite around 1pp fall since the August 4 meeting. We expect bond yields to trade within the 7.0-8.0% range in the coming months, due to non-residents’ ongoing quest for higher yields. We reckon that the historic trough of 6.88% (Jan’11) could be tested again, but only in case of benign CPI prints.
The CBT, guiding for its next monetary policy moves, has become markedly vocal on the value of the TRL against hard currencies, in a bid to engineer a soft landing... In order to predict the next move, we should know the scenario to which the CBT is currently attaching greater weight. In the first scenario, in case of concrete and satisfactory solutions to recent European debt problems, the CBT expects a rapid appreciation of the TRL, along with commodity price increases. In the framework of this scenario, the CBT would have to keep the RRR high and the policy rate low, in order to avert hot money inflows. Moreover, tighter measures to curb loan growth, such as a marginal reserve requirement, speed limit to borrowings, and restrictions to leverage ratios would be necessary. In the second scenario, featuring a delayed and dissatisfactory solution to recent problems, the CBT expects further TRL depreciation and envisages greater risk of a recession. Therefore, the RRR on TRL liabilities might be reduced gradually or aggressively, depending on the extent of the slowdown in that scenario. However, in both scenarios, the CBT leaves the door open for measured policy rate cuts, while underscoring that this would not necessarily be in the form of a series of rate cuts. On the other hand, at his recent interviews in some local TV channels, CBT Governor Basci sounded more hopeful about a resolution to EU debt problems: probably the mood change was related to the FOMC meeting dated August 9, where the FED expressed a commitment to hold FED funds rate at current low levels at least till mid-2013, while opening the door to QE3, as well as ECB secondary debt market buying Italian and Spanish bonds. However, the MPC is likely to remain cautious about the repercussions of financial shocks for the domestic economy, until it gets clearer signs of an improvement. For the time being, this would imply that the CBT still ascribes a higher possibility to the second scenario, as the root causes of global jitters -- record high Italian and Spanish yields -- were the sole trigger for the interim meeting, although the CBT Governor sounded otherwise recently. However, we think the current slight tendency in favour of the latter scenario is conditional and susceptible to data and event evolution.
Accumulating downside risks could trigger more drastic downward revisions… Globally and locally, growth view will hinge largely on short-term economic activity, domestic demand, and leading indicators, going forward, since downside risks are accumulating, as recent macro data releases have generally produced negative surprises. More importantly, this could trigger significant downward revisions to GDP forecasts and confirm the recent trend in stock markets.
Consecutive slumps in stock indices and the sharp retreat in bond yields prompt the perception that, more than a slowdown scenario, it is the scenario of a recession in the global economy that is being priced in... The foremost -- and as yet perhaps the single -- factor to support this perception to date is a key leading indicator, the Purchasing Managers Index (PMI), which has edged closer to the critical 50 threshold, considered to separate economic growth from contraction phases. Past data suggest that nearly each time that the index in question has dipped clearly below the 50 mark (levels at and below 45); an episode of economic contraction has ensued. Moreover, as growth has failed to gather adequate momentum despite quantitative easing programmes launched in developed economies and bail-out packages aimed at debt-stricken countries, overall sentiment has faltered, undermining hopes as to the effectiveness of potential additional measures. In case of a lack of developments to assuage these concerns and the persistence of risk aversion, we could evidence more dramatic declines in consumer and real sector confidence, and the risk of a negative feedback loop could increase notably. While such risks have started to become factored into market prices, they are yet to be duly reflected to economic forecasts. Such changes in global economic outlook will clearly have adverse ramifications for the Turkish economy, though the extent of the impact remains critical. Given the marked uncertainties concerning global economic outlook at this stage, we have opted for a scenario-based approach to come up with estimates for economic and financial aggregates for the near future. With this purpose, while maintaining our estimates in the framework of our baseline scenario for 2011-2012 despite accumulating downside risks, we add two further scenarios: i) “soft landing”; ii) “mild recession”. The scenarios include our estimates regarding the values other economic and financial indicators may take on the basis of quarterly and annual projections for GDP growth until YE12. Whilst forming our GDP estimates, we made assumptions regarding qoq changes in seasonally-adjusted GDP data, the primary indicator for the growth trend. For example, we assumed in the framework of our baseline scenario that there would be no change in growth in 2Q11 vis-à-vis the prior quarter of the year; that sub-potential growth would be registered in the subsequent three quarters (0.5%, 0.9% and 0.8%); and that once again above-potential growth would be recorded in the remaining three quarters (1.8%, 2.1% and 1.2%) until YE12. In this respect, our GDP growth estimates for 2011 and 2012 are 6% and 4.5%, respectively.
Our more negative alternative scenarios include our estimates as to the values growth rate may take in case of a series of flat/declining seasonally-adjusted quarterly GDP readings. In both scenarios, while the 2011 growth rate does not change substantially with respect to the baseline scenario, the effect is evidenced most notably on the 2012 growth rate. Even in the soft landing scenario, annual GDP change becomes 2.5%, undershooting the 4.5-5.0% range considered as the potential growth rate for the Turkish economy. This notwithstanding, even in the worst-case scenario that we envisage at this point, we do not expect the Turkish economic growth to slip to negative territory; i.e. contract, on an annual basis in 2012, even though we do not rule out quarterly contractions (Table 1). Our opinion is underpinned by technical, as well as fundamental reasons. The technical reason is that, the slowdown, which has deepened due to negative shocks, is poised to show its impact as of the latter half of the year, and this factor will diffuse the deceleration in growth to a two-year time frame. The fundamental reasons, on the other hand, are key factors such as the absolute and comparative relief provided by Turkey’s indebtedness indicators, and the soundness of the banking system, as well as the ability of the Central Bank and the government to resort to counter-cyclical monetary and fiscal policy moves in case of necessity.
Moreover, the CBT’s guidance on growth was not very negative for 2H11. Governor Basci pointed out that qoq changes in seasonally-adjusted GDP would be flat in 2Q and would be slightly positive in the remaining quarters. In other words, the CBT’s projections were not much different from our base-case scenario. However, they probably see downside risk to their forecasts, especially for 3Q and 4Q, since the measures adopted on August 4 have been presented as a means of containing the downside risks for our economy. As technical recession occurs when the level of real gross domestic product (sa) declines over two successive quarters, the CBT will consider this risk seriously and act accordingly. Let us remind you that even in the Eurozone, the epicentre of global financial tensions, GDP growth showed a positive, albeit small, change in 2Q.
All in all, given the limited time frame since the interim meeting and the persisting uncertainties regarding global economic outlook, we think the CBT should return to a wait-and-see mode to monitor the critical events related to EU debt problems. Given that the President of the European Council is assigned to make concrete proposals (to improve working methods and enhance crisis management) by October the earliest, we do not expect any rapid solutions in the near future. Therefore, the CBT is likely to tend more towards the pessimistic scenario; thus looks set to maintain an “easing” bias. However, this does not necessarily mean an imminent further easing at the scheduled August meeting. Although, we do not rule out another measured (25bp) policy rate cut, this is not our central view. Nor do we expect an RRR cut on TRL liabilities for the time being. Please note that even in our base-case scenario, we foresee around 200bp cut in RRR on TRL liabilities till the year-end.
The TRL may benefit in the short-term from a pause in easing, but this would be temporary, since the “easing” bias appears poised to be maintained. Hence, there will be a need for further verbal interventions (Governor Basci said they reckon the TRL basket should be 5-10% lower) and prevailing facilities (regular FX selling auctions, decrease in RRR on FX liabilities, US$10.8bn CBT FX deposit facility to banks) providing FX liquidity. Furthermore, the CBT could leave its FX selling unsterilized, meaning not compensate for TRL liquidity withdrawal and let the secondary market repo rates climb to the upper (PD at 8 %) limit to support the TRL against hard currencies. Other key factors to support the TRL might be 1) The 27% depreciation of the TRL against EM averages (Graph 3) since the beginning of 2010 on the heels of the CBT’s new monetary policy implementation; 2) The CPI-based real effective exchange rate index slipping remarkably below its long term averages, and becoming only 10% overvalued against the index with base-year 2003 (Graph 4). (REER against EM countries 8.6% undervalued, REER against Developed countries 18% overvalued, PPI-based REER 6.8% overvalued and unit labour cost based REER 20% overvalued) You might notice that none of the official indexes other than the REER against EM supports the Governor’s argument about the TRL’s undervaluation.
On the rates, we still see a downside potential for the benchmark bond yield, despite around 1pp fall since the August 4 meeting. We expect bond yields to trade within the 7.0-8.0% range in the coming months, due to non-residents’ ongoing quest for higher yields. We reckon that the historic trough of 6.88% (Jan’11) could be tested again, but only in case of benign CPI prints.
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