Gold's lustre lures Turkish savers

ISTANBUL — From the outside, it looks like any other automatic bank machine on the streets of Istanbul. But rather than notes, this one distributes small pieces of gold.

Gold is hugely prized in Turkey not just for ornamentation or investment by banks but as a secure way for private individuals to hold their savings.

Many people in Turkey, which has one of the lowest private savings rates among major economies, keep gold as security for a "rainy day" rather than products offered by banks.

According to estimates, Turks hold some 3,500 tonnes of gold. Banks have sought to capitalise on the tradition by offering accounts denominated in gold.

"We were thinking about putting all that gold back into the financial system somehow, so we decided to create gold accounts for our clients," said Seda Yilmaz, marketing manager of the Kuveyt Turk Bank, the first to do so, in 2007.

"So we bought one kilogramme of gold, and the demand on the first day was three kilogrammes. It was a very good decision, so we decided to move ahead," he added.

Eight years on, Kuveyt Turk manages 200,000 gold accounts with different products allowing sales by cheque, bank transfer or mobile phone.

Now with the introduction of the first automated teller machines (ATMs) that issue gold as well as the usual banknotes, consumers can withdraw pieces of gold weighing 1 or 1.5 grammes.

The success of the ATMs started a trend, with many other Turkish banks latching on. The volume of gold in their reserves has gone from two tonnes in 2007 to 250 tonnes.

The government has also tried to join the bandwagon with the central bank allowing commercial businesses to hold some of their reserves in gold and opening this up to private investors.

"Thanks to this measure, our sales jumped 85 per cent last year," said Aysen Esen, head of a leading gold refinery in the country.

"Over the last two years, banks have taken in some 40 tonnes of gold that people had stashed under their beds. And it's just a small proportion of the reserves,"  he added

'Huge opportunity' 

Turkey, where the mythical Phrygian King Midas turned everything to gold and Trojan King Priam was said to amass his gold hoard, has historically been a centre for gold mining.

The first gold was mined in Anatolia several millennia before the birth of Christ but until recent years there had been a long break in extraction.

This changed in the 1980s with new legislation facilitating foreign investments, resulting in the discovery of new gold deposits at home.

The extraction of gold has since risen exponentially, from two tonnes mined in 2002 to 33.5 tonnes in 2013. A bright future is assured, with underground reserves estimated at 6,500 tonnes.

"The main reason for this boom is that we still don't have any tax on gross gold transactions, we only pay VAT (value- added tax) on finished products," said Ali Bulut, the chief executive of Turkey's number one gold retailer Altinbas.

"I'm very optimistic in the long run about domestic demand, not only for fashion and jewellery but also for savings," he added.

Even if exchange rate variations have an effect on activity and profits, Turks are the number four global consumers of gold and number two exporters.

"In 2013, recycling, fabrication and consumption [of gold] boosted the Turkish economy by at least $3.8 billion," indicated Alistair Hewitt, author of a recent report published by the World Gold Council.

"The opportunity is huge. We are only at the early stages here, there is a huge potential," he said. "It's looking very, very exciting... all that infrastructure allows Turkey to become a gold trading hub within the region."

Made a little jealous by the successes of banks in a market that they once had to themselves, Turkish gold jewellers staked their interest in joining the gold investment industry.

"We are a little bit disappointed. We may need new legislation and have this gold end up with the jewellers instead of the banks," said Sarp Tarhanci of the Istanbul Chamber of Jewellery.

"Jewellers are customer-based, they build trust and good relationships with their clients," he added.

Turkey's performance in 2014 remained strong, according to the latest figures published by the World Gold Council, even if purchases were down on the extremely strong 2013.

2014 demand for gold jewellery of 68.2 tonnes in Turkey was down 7 per cent, "slightly more resilient" than the overall global trend of minus 10 per cent.

Meanwhile, investment demand of 54.8 tonnes was 46 per cent below the previous year's 102.1 tonnes record.

Separately,concerns are growing over the health of the Turkish economy, long seen as a star performer among emerging markets, partly due to unorthodox statements by President Recep Tayyip Erdogan on economic policy that have rattled investors.

Turkey's economic success of the past decade has been one of the pillars of the undefeated electoral success of Erdogan and his Justice and Development Party (AKP), with robust foreign investment and solid growth rates.

But economists now fear Turkey could be heading for an era of much lower sub-3 per cent growth as the AKP loses its reformist zeal ahead of June legislative elections, and Erdogan concentrates powers around the presidency after moving from the job of prime minister to head of state in August.

Moreover, Erdogan has become embroiled in a sometimes farcical row with the central bank, repeatedly telling the nominally independent institution in ever more heated terms to aggressively cut interest rates despite plus 7 per cent inflation.

His comments unnerved markets and Turkey's already embattled lira last week, for the first time, fell in value to the 2.5 lira against the dollar.

"At the moment, it's not clear whether this is posturing ahead of the election or more serious. But it does raise more general concerns about institutional independence in Turkey," William Jackson, senior economist at the Capital Economics Consultancy in London, told AFP.

'Undermining the future'  

Erdogan has in particular raised eyebrows by suggesting that high interest rates lead to high inflation, a suggestion that flies in the face of all economic orthodoxy which assumes that lowering interest rates increases inflation by raising consumer demand.

"Interest rate is a cause and inflation the result. But some of our friends think it is vice versa. What is the logic behind this?" Erdogan said before leaving on a trip to Latin America last week.

Central Bank Governor Erdem Basci, who has stood defiant in the row with Erdogan, pointedly noted that high inflation is detrimental to growth and "the best contribution to growth from a central bank would be to maintain price stability”.

Deputy Prime Minister Ali Babacan, one of the few top AKP figures with the full respect of markets, meanwhile warned about making exchange rate policies the "subject of daily political polemics".

Erdal Saglam, economics commentator for the Hurriyet daily, said that Erdogan's approach was "undermining Turkey's economic and political future" by risking scaring away the foreign investment that is key to its economic success.

In a sign of the tensions, the Taraf daily said Babacan had threatened to resign over the growing influence of Erdogan's adviser Yigit Bulut but was talked out of it by colleagues.

The whole issue is coming to a head as Turkey presides over the Group of 20 (G-20) of top economies for the first time. Babacan last week chaired the first meetings of G-20 finance ministers and central bank chiefs. 

'Miracle over'  

Turkey under Erdogan was long seen as a poster child for economic emerging market success, but these days the country is lumped into the so-called "fragile five" emerging markets along with Brazil, India, South Africa and Indonesia, which have become overly dependent on foreign investment.

"It's fair to say that the 'economic miracle' seen during the 2000s has come to an end," said Jackson. "Unless there's a drastic improvement, I would be surprised to see the Turkish economy grow at rates of 3 per cent plus for a sustained period over the coming years."

The consolation for Turkey in a tricky economic period is lower oil prices, a boon for an economy which is a major energy importer with one of the largest current account deficits among emerging markets.

The current account deficit fell 29 per cent to $45.8 billion in 2014 thanks to lower oil prices, the central bank indicated Wednesday.

Fitch Ratings said the figures showed the economy's "capacity for rebalancing" but warned its resilience "may be tested in 2015" by tighter US monetary policy or geopolitical risks.

Turkey still has a long way to go to meet Erdogan's much-vaunted ambition of making it one of the world's top 10 economies — currently it is number 18 according to the World Bank — when the 100th anniversary of the modern republic is celebrated in 2023.

A report on global growth published by the Organisation for Economic Cooperation and Development (OECD) last week said that Turkey's income gap with the upper half of OECD countries "continues to narrow but remains large".

It called for reform to encourage formal employment in particular among the older generation and women, many Turks are employed illegally due to excessive regulation, as well as improvements to the inconsistent education system.