POST 2001 CRISIS: TOWARDS MACROECONOMIC STABILITY
Since 2001: towards macroeconomic stability Important steps towards macroeconomic stability Fiscal discipline: – Low public debt and budget deficit – Low real borrowing rates Stronger banking sector: – Low non-performing loans – Upward trend in credit-to-GDP ratio – Satisfactory capital-to-asset ratio Independent central bank and banking regulation and supervision agency
2008-2014 is radically different than 2002-2007 Growth in 2002-2007 was rather high. However, despite strong fiscal and financial position, high growth performance did not continue afterwards. Turkey is one of the economies that contracted most in 2009. Growth in the 2012-2014 period is low… There is inertia in inflation and unemployment WHY?
2015 What will be the main drivers of the Turkish economy in 2015? – External financing (net capital inflows) – June general elections – Energy prices – Economic outlook for Europe, Middle East and North Africa Main determinant will be amount of external financing WHY?
Importance of external financing: mediocre level of investment (% GDP)
Importance of external financing: strikingly low level of savings (% GDP)
Importance of external financing: high savings-investment gap (current account deficit)
Importance of external financing: Episodes of surge in capital inflows: – Increase in asset prices, appreciation of the lira, decrease in interest rates, rise in confidence – Rapid domestic credit growth Episodes of capital outflows or ‘sudden stops’: – Decrease in asset prices, depreciation of the lira, and increase in interest rates, reduction in confidence – Low domestic credit growth or credit crunch
Net external financing and real domestic credit cycle
Net external financing and real value of the lira
Determinants of net external financing Push factors: – International risk appetite: would mainly be shaped by decisions of large central banks: FED, ECB, BOJ, BOE Pull factors: – Domestic risks: June (?) general election – Domestic risks: War against Isis (Iraq, Syria, and U.S.) – Economic policy –particularly monetary policy
International risk appetite FED will start increasing interest rates in 2015 (when?) In the past (in the 1990s for example) such a policy always created severe problems in emerging economies with significant current account deficits. However, large emerging market economies have much more stronger economic fundamentals Nevertheless, savings-deficit emerging economies like Turkey will be affected negatively.
International risk appetite The extent of negative development would depend on the cumulative amount of increase in policy rate of FED and its timing. BOE is also going to start tightening. The ECB and BOJ are in the easing cycle. Could ECB and BOJ easing offset FED and BOE tightening? NO! FED is the dominant player.
Domestic risks: general election in Turkey According to commentators AKP will win June general election The main question is whether AKP could gain enough number of seats in the parliament to change the constitution. Would this uncertainty lead the incumbent to ease fiscal policy and unwind January 2014 prudential restrictions on consumer credits?
Domestic risks: general election in Turkey The government could increase government consumption and investment. This increase might have already started. Note that such easing would not undermine fiscal discipline (7 months to elections) However it could temporarily increase GDP growth. These developments would not increase risk perception for Turkey.
Domestic risks: general election in Turkey At the beginning of 2014 Banking Regulation and Supervision Authority (BRSA) took various decisions to contain rapid consumer credit growth. Those decisions proved to be rather effective: rate of growth of consumer credits declined to 15 percent from a level of more than 30%. One of the main determinants of private consumption (70% of GDP) is consumer credit growth.
Domestic risks: general election in Turkey Would BRSA unwind these decisions? If it unwinds this will cause an increase in consumer credit and private consumption. However, such a move could increase risk perception for Turkey.
Domestic risks: war against Isis The war against Isis substantially affects domestic politics and international relations of Turkey. Domestic: it has the potential to lead to an uprising in the South East if the “Turkey is not doing anything to help Kobani” perception among the Kurds would mushroom. This could jeopardize peace negotiations between Turkey and Abdullah Öcalan –the jailed leader of PKK. This possibility decreased for the time being by the government’s move to let
Domestic risks: war against Isis This possibility decreased for the time being by the government’s move – in late October to let 150+ peshmerga –soldiers of the Northern Iraq Kurdish army- to pass to Kobani with ammunition and weapons. – simultaneously it took some steps to accelerate peace negotiations with Abdullah Öcalan (of course also with PKK). Note that the government has recently sent a bill on security to be passed through the parliament the main aim of which is to punish more those who engage in acts of violence.
Domestic risks: war against Isis The U.S. and Turkey: U.S. vice president Biden visited Turkey on the second half of November Washington Post (after the visit): “The visit did not result in any firm new agreements over such sensitive issues as Turkey’s long-standing call that protected buffer zones be created inside Syria along the Turkish border, or U.S. requests to use Turkey’s Incirlik Air Base to fly bombing missions against the Islamic State in Syria and Iraq.” According to Turkish commentators, the U.S. and Turkey agreed on issues related to Iraq whereas they kept their disagreement on Syria issues intact.
Domestic risks: economic policy Fiscal stance is strong. A temporary easing before the elections would not undermine this position. Banking sector is also strong. Two minor (?) risks: – Occasionally the pressure on the Central Bank rises. – As noted before: could restriction on credit growth be eased?
A reminder (confession): Forecasts for 2014 in the 27th November 2013 meeting of the Turkish Foundry Association (Likely realizations in parenthesis) Growth: 3-3.5% (around 3%, first half: 3.3%) Unemployment: 10.5% (10.4%) Average inflation: 7.5-8.5% (first 10 months: 8.9) Exports: Mildly above 2013 performance (first 10 months: 6.2% in 2013, 5.8% in 2014 (non-gold)) Current account deficit: Slightly below 7% of GDP (around %5.5 of GDP)
Base scenario… FED will start to increase its policy rate around mid 2015. This will cause a rise in 10-year US Treasury rate to at least 3%. A mild increase in growth in Europe (IMF). A mild increase in growth in Middle East and North Africa (IMF). ECB continues to easing to the extent that Germany allows. Petroleum prices will stay at around 80$ per barrel (Brent).
Base scenario… No further deterioration in the U.S.-Turkey relations. Uncertainty due to war against Isis continues. The so called ‘solution process’ (peace negotiations between Turkey and PKK) continues. A market friendly minister responsible from economy would be appointed after June elections.
2015 forecasts Close to 3% GDP growth in 2015 would be a success. Inflation could hover around 8% as in the last three years or so. Unemployment rate can be in the 10-11% band. Current account deficit could decrease to 5% of GDP.
THE TURKISH ECONOMY Fatih ÖZATAY December 2, 2014 Ankara