Monday, April 4, 2011

Weekly Hurriyet Column: A Turkey’s growing pains

Below is my Hurriyet Daily News & Economic Review column for this week, which you can also read at the Daily News website.  As for the title, I know it is a bit derogatory, but being a Turk, I am entitled to Turkish jokes, just as Jewish dentists are entitled to Jewish and/or dentist jokes. "Growing Pains" loosely refers to the 80s show of the same name. Yep, I witnessed the 80s, but I was only a kid then:)

As always, there will be an addendum. Reader "babadog" makes quite interesting remarks as a comment to the column. I will expand on my points to him as well as note a couple of interesting facts about the growth statistics. Anyway, without further chit chat, on to the column:

Data released on the last day of March do a pretty good job of taking a snapshot of the Turkish economy.

First, the economy grew 9.2 percent yearly in the last quarter of 2010, bringing growth for the whole year to 8.9 percent. While this number seems rather impressive at first look, you must remember that what goes down must come up: Just as last year’s figure puts Turkey at the top of the growth league, the 2009 contraction of 4.8 percent was one of the highest among the country’s peers.

In fact, average growth during the last three years is a mere 1.6 percent. While this number might be rather satisfactory for the mature economies of developed countries, it is far from enough for Turkey. For one thing, it is definitely not sufficient for creating enough jobs to keep unemployment at bay.

Coming back to Thursday’s release, even a casual look is more than enough to illustrate the unbalanced growth profile: Domestic demand contributed 15.4 percent to growth, while foreign demand, because of imports growing much faster than exports, stole 5.6 percent from it, with stock depletion cropping a further 0.6 percent.
This is Turkey’s familiar disease of depending too much on external financing for growth, a direct result of its low domestic savings rate. In fact, growth breakdown is very similar to the previous quarter’s, except that the scale is now much larger.

Such unbalanced growth is cause for concern because it is unsustainable: If capital flows were to dry up, we could see a sharp adjustment either through quantities or prices. In other words, either the economy would contract, or the exchange rate would depreciate sharply.

Latest data suggest that the portrait is getting bleaker. The trade deficit continued its record run when the February figures were released on Thursday as well. While exports grew 22 percent yearly, import growth was a whopping 48.7 percent, and the wedge between export and import growth rates continued to widen.

It remains to be seen whether the Central Bank of Turkey’s latest measures have been successful at all in slowing loan growth and therefore curbing imports and the trade deficit. Governor Durmuş Yılmaz had noted in his ill-famed The Wall Street Journal speech that economists would need to wait until at least the end of March to judge whether the Bank’s policies were working.

In that sense, I am really looking forward to next week, as not only will complete loan data from end-March be available, but import taxes, which are used to project imports, will be released along with the March budget figures as well. I am more than happy to give Yılmaz the benefit of the doubt until then.

Speaking of the Central Bank, the growth and trade deficit prints also show how much behind the curve the Bank has been. No one would have blamed the CBT if the sharp reserve requirement ratio, or RRR, hikes of last month had been done in December.

Instead, the Bank opted for its unconventional policy mix of lowering the policy rate and increasing RRRs, which was, although the Bank claimed otherwise, net-expansionary. The Central Bank lowered the policy rate for the noble cause of deterring hot money, where it has largely succeeded.

But in retrospect, after having seen the growth figures, cutting rates in December looks more like adding fuel to the fire. As for the Bank’s quantitative tightening measures, with the trade deficit and other recent demand indicators hinting that growth has hardly lost steam, one cannot help but ask if the Bank acted first too little, then too late.

Let’s hope that the Central Bank’s policies will work. Because if they will not, the government’s and the Bank’s hands will be virtually tied until the general elections.

*Emre Deliveli is a freelance consultant and columnist for Hürriyet Daily News & Economic Review and Forbes as well as a contributor to Roubini Global Economics. Read his economics blog at

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