MONTREAL - The Turkish lira has accelerated its decline against the US dollar,
recovering so far only marginally this week from Monday's 1.5% drop, to the
level of 1.85 lira to the dollar. This level is also down 4% in the last month
and 16% this year, the second-worst performance of all emerging market
While this depreciation has helped to decrease Turkey's trade deficit, the
Central Bank of the Republic of Turkey (CBRT) has published a policy document
indicating that it is now concerned with minimizing the impact on inflation.
The CBRT decided a month ago to make its rates more flexible, setting then on a
daily basis between within an interval running from 5.75% to 12%.
However, it risks finding itself in a difficult situation between the
unexpectedly high inflation rate and the weakening domestic and
Inflation in October over September was the highest month-on-month rate in nine
years, at 3.3%, while year-on-year increased to 7.7%. Year-on-year inflation
will probably approach 10% in the first few months of 2012. Last month, the
CBRT upgraded its year-end inflation forecast to 8.3% from 6.9%, well above the
bank's annual inflation target of 5.5%. Consensus international estimates for
Turkish inflation for 2012 hover in the range between 7.5% and 8%.
Statements by Finance Minister Mehmet Simsek suggest less of an anti-inflation
focus and more of an accent on maintaining conditions for healthy economic
growth. The success of that policy so far led Standard & Poor's in
September to raise Turkey's debt rating by two notches, from "BB" to "BBB-"
(the lowest investment-grade rating). Turkey's economy grew at an 8.9% rate in
2010 and 11% for the first four months of 2011, although this has slowed to
such a degree that the projected rate for the whole of calendar year 2011 is
7.2%, taking also into account the likelihood of a global slowdown.
Industrial production in September rose 12% over September 2010, easily
outpacing market expectations of 6.9%, while the Purchasing Managers Index
vaulted to 53.3, a seven-month high, from below the neutral 50 level in August.
Turkey is now the world's 16th-largest economy.
The Turkish stock market has not responded to the apparently rosy scenario
painted by macroeconomic indicators. The Istanbul Stock Exchange (ISE) 100
Index closed on Tuesday at 51,986, down 14.6% in the last two months and 23.1%
from the beginning of the year. Since the year's high in May, the index has
traced out a marked series of declining tops with perhaps the last potential
post-crisis long-term support just under the 50,000 level. Potential pre-crisis
support levels could kick in, in the mid 46,400s or, more solidly, in an
interval around 43,000.
So why have the Istanbul equities markets failed to respond to Turkey's
until-recent stellar economic performance? Well, they did respond at the time.
However, markets respond not to past performance but to changes in expectations
of future performance. The recent economic growth has brought about a large
current account deficit, which widened to a record US$77.5 billion for the 12
months through September, equivalent to about 10% of the country's annual
Consequently, unless the appetite for risk strengthens going forward, which
seems unlikely, a slowdown is probably in the cards. Also the Turkish economy
depends very much on what is happening to European trade partners, which
account for roughly half of the country's trade turnover. Risk appetite in
Turkey will decline if the European Union cannot properly handle the eurozone
crisis and the euro consequently weakens.
Moreover, expectations of global growth have deteriorated and Turkey is a
"high-beta" country in relation to global growth: meaning that when global
growth is good, Turkey significantly outperforms the average; but when global
growth is dismal, Turkey significantly underperforms the average.
The Turkish finance ministry is projecting 4% growth in gross domestic product
(GDP) for 2012, while the consensus among international economists is closer to
between 2% and 3%. There is, however, more of a downside than an upside risk to
the official estimate because of prospective circumstances in the eurozone, and
moreover in the event that global commodity prices stay high.
Those who believe that Turkey can manage a soft landing argue that the lira
depreciation has already provided a modicum of adjustment, and also that
monetary and financial policies have been tightened by the central authority so
as to moderate domestic demand, avoiding the danger of bubbles.
Dr Robert M Cutler (http://www.robertcutler.org),
educated at the Massachusetts Institute of Technology and The University of
Michigan, has researched and taught at universities in the United States,
Canada, France, Switzerland, and Russia. Now senior research fellow in the
Institute of European, Russian and Eurasian Studies, Carleton University,
Canada, he also consults privately in a variety of fields.
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