Former central bank chief economist Prof. DR. Hakan Kara and former finance manager Coşkun Cangöz assessed the possible impact of the inflation-linked bond, which is said to be prepared for citizens, on exchange rates, stock markets and interest bills for sozcu.com.tr.
The market is awaiting the inflation-linked bond that Finance and Finance Minister Nureddin Nebati announced three weeks ago that “the design work is complete”.
While the rise in exchange rates has accelerated in recent days despite currency-hedged deposits (KKM), disguised reserve sales and other measures, how the inflation-linked bond, which is said to be for citizens, is being discussed, but its maturity and other details have not been disclosed , will affect the current situation.
Former Central Bank Chief Economist (CBRT) and Bilkent University faculty member Prof. DR Hakan Kara and Coşkun Cangöz, former Director General of Public Finance of the Undersecretariat of the Treasury, assessed to sozcu.com.tr the potential impact of the said bond issue.
“CITIZENS PREFER BONDING THAN DEPOSIT”
“Inflation-linked bonds already exist, but their access is relatively limited and their use by the public is not very widespread because the product is not standardized,” Kara said, adding, “If the Treasury wants to issue such a bond, it has to be.” to design a short-term, understandable and accessible product. When that happens, there will be interest,” he said.
Noting that citizens would hold inflation-linked bonds instead of TL deposits, which yield around 17-20 percent interest, Kara said, “Transitions from KKM could be more limited as inflation-linked bonds are not a substitute for foreign currency deposits.” If there is a move from here, that demand will likely come from those who have already moved from TL to KKM.”
‘INTEREST RATES LIMITED TO RISE’
Also discussed is what will happen to the deposits in banks when this product is released. Kara explained that when the inflation-linked bond issuance, some deposits are initially withdrawn from the banks, but when the Treasury spends the resources obtained with these bonds, they become deposits again and made the following assessment:
“First, of course, it may push up general interest rates by increasing deposit competition among banks, but as long as the CBRT funds banks at 14 percent, the rise in deposit rates will be limited. It appears that there is enough safety stock for the banks to receive these loans from the CBRT.”
Kara explained that he doesn’t think the inflation-linked bond will cause a problem for the banking system if it’s designed properly, saying, “It will only cause some upward movement in general interest rates.”
“TEMPORARY RELIEF IN COURSES”
Another curious question is how the product in question affects exchange rates. According to Kara, the initial issuance of the inflation-linked bond provides partial relief in the foreign exchange market, but this relief will be temporary as long as the current account deficit problem persists without foreign finance flowing into the country.
Kara explained that the impact of these bonds on Borsa Istanbul will be negative as some of the recent demand for stocks has been driven by the need to protect against inflation.
“THE TREASURE WILL INCREASE INTEREST PAYMENTS”
Regarding the interest burden this bond will bring to the Treasury, Kara said, “With this bond, the Treasury’s notional interest payments will naturally increase since the Treasury currently pays 26 percent interest on the bond.” Therefore, in a world where inflation is 70-80 percent, Treasury interest payments on inflation-linked bonds will increase.”
However, Kara reminded that there is an indirect strain on the Treasury if the exchange rate rises in the currency-protected deposits, saying: “Therefore, if this new bond is designed in such a way that part of the KKM becomes an inflation-indexed bond.” , I think the overall cost to Treasury will be limited in the medium term.”
Kara said, “Let me finish without saying this,” Kara said, “All of this postpones problems instead of solving them and even makes them bigger when posting. The main problem on the Treasury debt side, I believe, will be the high real interest rate that will have to be paid at some point in the future due to the increase in the risk premium.”
‘MAIN PROBLEM NEGATIVE REAL RATE’
Coşkun Cangöz recalled that in 1994, during Tansu Çiller’s tenure, the Ministry of Finance issued three-month “superbonds” to citizens and the annual interest rate on this product was 200 percent, saying that interest rates were suppressed at the time and there was a problem in the lending of the Treasury. He said he would go.
Cangöz explained that the main problem at present is the flight of citizens from TL due to negative real interest rates and that the economic leadership is looking for alternative ways, Cangöz stressed that the current inflation-indexed bonds are bought by banks and held in their portfolios and that citizens are not accessing them be able.
“It can have disruptive effects on the market”
Cangöz said the first effect is an increase in banks’ deposit rates: “Banks will increase the deposit rate by 17 percent. In this case, the economic administration’s thesis “We keep interest rates low, credit cheap” will disappear,” he said.
Explaining that the Treasury can distribute the funds raised through bonds as cheap loans to companies, Cangöz warned of a second effect: “If you say, let’s take the deposit to the Treasury, let’s use subsidized loans in different ways, it can.” exclude the financial sector and have a distorting effect on the market.”
Cangöz explained that the said product will further increase the Treasury’s interest expenditure and worsen the situation: “Currently, domestic debt interest rates have exceeded the domestic debt stock. So the glass is full. As the exchange rate rises, the burden of KKM on the household increases, and as inflation rises, so does the interest burden.
INTEREST BILL EXCEEDED 2 TRILLION TL
On the other hand, the interest bill that has arisen as a result of the government’s rate-cutting operation is growing.
According to data released yesterday by the Ministry of Finance and Finance, the sum of future interest payments on domestic debt, which was 722 billion TL at the end of August 2021, increased to 2 trillion 53 billion TL in April 2022.
Thus, in just 8 months, the interest burden that the Ministry of Finance will pay with the taxes collected from citizens has increased by 1 trillion 331 billion TL.
THE MAIN REASON IS INFLATION-INDEXED BONDS
Veteran banker Kerim Rota explained that the main reason for the rise was interest charges on inflation-linked bonds owned by banks.
While the CBRT cut interest rates from 19 percent to 14 percent, consumer inflation announced by Turkstat rose to 70 percent from 19.25 percent. Not only did this increase push up fixed interest rates, but the interest burden on inflation-linked bonds also increased rapidly.
The Treasury’s domestic interest burden, which was TL348 billion in June 2018 before the transition to the presidential system of government, has more than doubled in less than four years.
In the four years in question, the central government’s debt level also increased from TL 970 billion to TL 3 trillion 125 billion.
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