Turkish investors left at loss after interest rate plunge

Harmonie Toros

Sunday, May 21, 2000 | 1:51 a.m.

ISTANBUL, Turkey - Two years ago, retired civil servant Ulku Gurel sold her apartment and put the proceeds into an account making overnight loans to banks.

With high inflation fueling extremely high interest rates, such overnight repurchasing accounts saw a boom in investing by middle class Turks like Gurel.

She was thrilled with the results. She made the equivalent of about $1,000 a month on the 6 million Turkish lira (about $10,000) deposited in the account - income three times her retirement pay.

Then the government introduced an ambitious anti-inflation program late last year, and interest rates have collapsed. On Dec. 23, the "repo" accounts, as they are known, were paying 85 percent interest. By Jan. 4, overnight rates had plunged to 31 percent. TdL

With inflation running at 63 percent last year, banks offerdiLvfry high interest rates to attract Turks to lira investments and away from buying hard currencies, mainly U.S. dollars or German marks.

In repurchaso f deals, banks buy Turkish lira for short periods of time - often just one night - at rates higher than inflation and use the money to buy short-term government bills.

Last year, Turks who invested in "repo" - a term that has entered the Turkish language - were earning at an annual rate of 120 percent on their accounts. Companies also invested their extra cash in overnight repos, because it gave high yields without tying up the money for long periods.

But the practice was dangerous for banks, which invest in 12- or 18-month bills with repo money lent to them for one night. "It's a maturity mismatch," said Yarkin Cebeci of Ottoman Bank.

So when the government took its first steps to reduce inflation to 20 percent by the end of this year - a program backed by a $4 billions loan from the International Monetary Fund - banks immediately cut repo interest rates.

"We are experiencing a transition period where expectations have led to a very quick response in terms of asset prices. Stock prices have gone up, yields have come down enormously," said Turgut Tokgoz of Eczacibasi Securities.

Banks and other financial institutions are trying to steer Turks toward alternative investments, including mutual funds, and some have turned to the stock market.

"This is good for the market because it increases the depth in the financial system, increases the demands in stocks and promotes institutional investments," said Tevfik Aksoy, chief economist of BankEkspres.

But many small investors remain wary of stocks. A volatile market is a bigger risk than the more secure repo accounts.

"It's a dangerous place," said Asaf Savas Akat, economics professor of Istanbul's Bilgi University. "There is manipulation; there is speculation. Like all stock markets, it's a place for experts."

Investors have also turned to state privatizations. Demand for shares in the state refiner Tupras was three times higher than the government's preliminary offer, prompting the state to increase the percentage of shares on sale from 15 percent of the company to 31.5 percent.

Despite the slump in their return, many middle class Turks are sticking with repo accounts. The amount of money invested in repo accounts is higher now than it was at the end of 1999, reaching $15.5 billion in April compared to $12 billion in December.

"During times of confusion, people will still choose repos," said Aksoy, who expects the amount in repo accounts to decline gradually.

Although inflation is falling, it is still running at an annual rate of about 61.5 percent.

"My income is decreasing, but prices are still going up," said Gurel. "If the economy gets better and inflation comes down, that's OK. But if it doesn't, I don't know what I'll do."

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On the Net:

IMF's Turkey page: http://www.imf.org/external/country/TUR/index.htm

Turkish Central Bank: http://tcmb.gov.tr