Turkey Goes for the Gold in a Bid to Curb Deficit

The Wall Street Journal (USA) March 22, 2012, p. 2-15

By Yeliz Candemir and Joe Parkinson, Istanbul

Faced with a bloated current-account deficit that threatens to derail Turkey’s rapid expansion, Ankara is trying to persuade Turks to transfer their vast personal holdings of gold from their households to the country’s banking system.

The push to tap into the individual gold reserves— the traditional form of savings here—is part of Ankara’s efforts to reduce a finance gap currently about 10% of gross domestic product.

Government officials say the banking regulator will soon publish a plan to boost incentives for consumers to park their household wealth inside the financial system. Banking executives said they are considering new interest- yielding gold-deposit accounts that would allow savers to withdraw gold bars from specially designed automated teller machines.

The moves come after the central bank in November announced that lenders could hold up to 10% of their local currency reserves in gold, in part to tempt Turkey’s gold hoarders to deposit their jewelry, coins or bullion at banks.

Economists say the policy shift is designed to change Turks’ historic preference to store a high percentage of personal wealth outside the banking system as a way to protect themselves against the economic volatility that has periodically hit Turkey in recent decades.

The effort also forms one front in a broader battle to lift Turkey’s low savings tendencies while curbing the ballooning current-account deficit— a pressure point many investors fear could upend a fast-growing economy estimated to have expanded more than 8% last year. Turkey’s current- account gap has expanded faster than expected in recent weeks amid a surge in the price of oil and data showing unexpectedly high consumer demand.

“Turkey has historically been hit by crises and inflation, so the tradition of holding gold outside the system could be hard to shift,” said Murat Ucer, an economist at Global Source Partners, an Istanbul-based research consultancy. The size of the gold haul stored outside Turkey’s banking system is hard to quantify, because no data reliably capture the scale of the informal economy. The Istanbul Gold Refinery estimates the figure at 5,000 metric tons, valued at $ 270 billion. Recent numbers show many consumers have boosted home-held deposits even as the country’s tightly regulated banking system won plaudits for comfortably weathering the financial crisis.

Last year, as the Turkish lira tumbled almost 20% against the dollar—the fastest fall of any currency in the world—turkish demand for gold bars and coins surged 99% compared with the previous year, according to data from the World Gold Council.

That suggests that despite a tripling of incomes and a sharp reduction of unemployment in the past decade, Turks remain nervous that holding too much of their assets in banks could leave them exposed.

Data also show savings held inside the financial system have declined sharply as the once-volatile economy entered a period of relative stability after a banking crisis in 2001.

Some economists warn the government’s initiative is a sideshow, stressing that policy makers should be focused on overhauling Turkey’s arcane tax regulation, and boosting public coffers by effectively collecting taxes.

For some Turks, the government will have to unveil a lot more sweeteners before they part with the family gold. “I’m keen to save, so keeping gold at home is easy for me; there is no complicated procedure,” said Ayten Altin, 70 years old, a housewife from Istanbul. “In an emergency, I can convert it to cash and I don’t have to wait for the bank to say the asset has matured.”

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