Central bank governor of the year 2009: Durmus Yilmaz, Turkey

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By:
Sudip Roy
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With nearly 30 years’ experience at the central bank, Durmus Yilmaz is the ideal person to steer the country’s financial system through the global credit crisis. Sudip Roy reports.

Central bank governor of the year: Durmus Yilmaz, TurkeyQUIET, MODEST, UNASSUMING, Durmus Yilmaz has the ideal traits needed to lead a central bank through the worst financial crisis to have struck the global economy in more than 50 years. The head of the Central Bank of Turkey says that despite the extraordinary challenges he has faced over the past 12 months he himself has not changed.

"I consider myself an ordinary man who happens to be in the central bank and has been given the responsibility of the job and does that job to the best of my ability," he says in an interview with Euromoney.

Luckily for Turkey, Yilmaz has proven skills that are admired throughout the country’s banking industry. "He is a very wise and visionary person," says Ziya Akkurt, chief executive at Akbank. "He is seen as a calm person. He always takes initiatives on time and without fear."

Although Turkey is often singled out by analysts as being among those countries most vulnerable to the global credit crisis, so far its financial system, although not necessarily its economy, has proved to be relatively resilient. That could change quickly. It has a history of financial woes – the most recent in 2001. Its economy is struggling and there are signs that some banks could face looming non-performing loans troubles.

But so far its financial system has not gone into meltdown and its banks are relatively well capitalized and liquid. A lot of the credit for this stability can be attributed to Yilmaz and his colleagues at the central bank. Their actions over the past year were not necessarily as extreme as those taken by central bankers elsewhere. But Turkey was facing problems similar to those in the US and the rest of Europe: a shortage of liquidity, a crisis of confidence and a fear of the unknown.

At the height of the crisis, following Lehman Brothers’ bankruptcy in September 2008, the central bank acted quickly to restore confidence by putting through a number of measures. These included launching daily FX auctions in line with the floating exchange rate regime to support market liquidity.

Another critical thing the central bank did was to act as a conduit for banks to lend to each other and guarantee counterparty risk. It also opened a special facility, worth $10.8 billion in total, for banks to borrow in dollars and euros. No bank, however, has needed to tap either facility. In addition, the central bank lowered the foreign currency reserves ratio that banks have to hold from 11% to 9%.

Yilmaz says that Turkey’s banks entered the financial crisis reasonably well prepared, having undergone substantial restructuring following their troubles in 2001. The banks, for example, did not hold sizeable FX short positions. Net FX positions of the banks are at a low level compared with their equity. In addition, the foreign-currency-denominated proportion of their overall consumer loan book is less than 5%.

The banking sector is well capitalized too. The average capital adequacy ratio for the banking sector as of June was 19% – much higher than the minimum 8% required by the Basle Committee and the 12% stipulated by the local regulator.

Easing rates

As for monetary policy, Yilmaz has continually eased rates since the end of last year in an attempt to boost local credit market conditions. Last month the central bank lowered its benchmark borrowing rate by 50 basis points to 7.75%. "Tightness in the credit markets is easing. At the height of the Lehman Brothers crisis the interest rate on commercial credit was more than 20%, now it is 15%," says Yilmaz, although he admits that there are still problems regarding both the demand and supply of credit.

One of the challenges that local banks face is that the average maturity of their deposits is less than three months, which means it is difficult for them to provide long-term financing.

Yilmaz says the central bank will cut interest rates further if necessary. The latest cut brought total easing since November to nine percentage points.

"Reading the domestic and international data, the recovery will be slow and gradual so interest rates will be low for a considerable period of time," says Yilmaz.

Much, though, also depends on the government’s plans to deliver a new fiscal programme that will show how it intends to balance its books after running a deficit this year – the first primary deficit since the AK party took power in 2002. "Provided the government delivers a reasonable medium-term fiscal programme and the market believes in it, interest rates could be eased a little bit further. But it’s conditional on the fiscal programme," says Yilmaz.

How much lower Turkey’s benchmark rate might fall is not something Yilmaz can be precise about. "I’m not inclined to say that there is a floor – it depends on the data and circumstances. We are very far from zero interest rates, though. Our situation is very different to the US and Europe," he says.

He adds, however, that the benchmark rate will remain in single digits until the end of 2010 as long as the government fulfils its fiscal pledges.

Economic struggles

The Turkish authorities will hope the low-interest-rate environment will stimulate the economy, which has struggled as global conditions deteriorated. In the first quarter of this year, the economy shrank by a shocking 13.8% – its worst performance on record. Yilmaz believes that the economy will continue to contract until the fourth quarter, when growth should return. For the year overall he believes that the economy will shrink by 5% at worst.

Analysts at consultancy RGE Monitor say that Turkey’s economy will rebound relatively quickly because of the soundness of the financial system. "The banking sector is in good shape in the wake of reforms implemented after the 2001 crisis, meaning Turkey will likely experience a faster return to growth than those countries experiencing financial sector distress," wrote Mary Stokes and David Rogovic in a blog on August 5. "While 2009 will not be a banner year for the Turkish economy, the tide could turn quickly next year."

Nevertheless recession, especially in Europe, has hit Turkey hard. The region accounts for more than 50% of Turkey’s exports, with Germany and France among its biggest markets. The auto and consumer durables industries have been most vulnerable.

"As European markets fell, that had a huge impact on our economy," says Yilmaz. Signs that France and Germany might no longer be in recession are positive for Turkey, although Yilmaz is cautious about how sustainable theirs and the rest of the world’s recovery will prove to be. When asked if he believes that there is a chance of a double-dip recession, he says: "There could still be a risk." He’s especially concerned that too many of the toxic investments that brought down the financial system are still sitting on banks’ balance sheets.

One thing Yilmaz is confident about is that the lagging economy will not lead to a spiralling of bad debts at Turkish banks. Although the NPL ratio rose to 5% of total loans at the beginning of August, up from 3% just before Lehman Brothers’ bankruptcy, he believes that the banks have greatly improved their risk management skills. "Ninety percent of NPLs are provisioned for," he says.

He adds: "Even if NPLs were 15 percentage points higher, that is, the ratio was 20%, the Turkish banking system’s capital adequacy ratio would not fall below 12%."

However, he warns: "That doesn’t mean we should be complacent." The central bank conducts stress tests on the banks every month according to different situations. "As the central bank we have to be careful about NPLs," he says. The biggest area of concern is bad debts from credit cards, which make up 10% of total bank lending and account for one-fifth of all NPLs.

IMF deal or no deal?

The other issue investors are watching carefully is relations with the IMF and whether or not a new loan agreement will soon be signed. Sources in the finance ministry have indicated that negotiations are focused on the amount of the loan, which could as much as $45 billion, and not the content of the economic measures.

Formal talks between Ankara and the Fund on replacing a stand-by deal that expired in May 2008 have stalled over the government’s fiscal plans, but ministers say they want an agreement before the end of the month.

"It’s a political decision," says Yilmaz about whether or not a deal will be reached soon. "There is a trade-off between there not being an agreement and contending with low growth and high unemployment."

Some local analysts believe an IMF deal is no longer as important as it was a year ago because of $18 billion of foreign-currency inflows since October. These have helped drive the Turkish lira to a nine-month high and cut the current account deficit to $1.92 billion at the end of June from $5.5 billion a year earlier. The central bank is examining the cause of these inflows, although the most likely explanation is a repatriation of funds from Europe and other offshore accounts by Turkish companies and investors.

Yilmaz, however, believes an IMF agreement is still important because of the fiscal discipline it will instil in government. "The IMF has helped impose discipline over the past six years since the 2001 crisis," he says.

A day-to-day focus

Appointed in April 2006, Yilmaz has 20 months left in his five-year term. But he says he’s not thinking about a possible second term. He’s just concentrating on day-to-day events. Yilmaz makes his job sound simple. "I read the data and make the decisions," he says.

But as someone who has spent 29 years at the central bank he knows that there is more to being a successful central banker than that. "Experience is important," he says. "You have to have a basic understanding of the markets but you also have to have a sense of smelling the markets too. You can’t get that through the textbooks but through experience."

The UK-educated Yilmaz began his career at the central bank in the foreign exchange department, working in foreign debt rescheduling, exchange rates and foreign exchange reserve management.

He also had roles in the inter-bank money market and balance of payments divisions before becoming deputy executive director at the markets department in 1996, where his job included supervising foreign exchange risk management and credits. He was elected a member of the board in 2003.

For more on Turkey, see Can Turkish banks avoid economic reality?

World Bank/IMF special focus: Global economic outlook and financial stability