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Minister Albayrak in wonderland!

20 March 2019

Treasury and Finance Minister Albayrak’s comments yesterday on the Turkish economy appeared rather puzzling and perhaps to some degree amusing for those who have a grasp of the Turkish economic dynamics.

Albayrak argued that Turkey’s 20% consumer price inflation rate will drop to single digits by around September versus the government’s year-end goal of 15.9% and the official target inflation rate of 5%.

He informed that the AKP government was planning a deep-rooted and permanent transformation on which he refrained from giving the details. He further claimed that as the inflation will be lowered soon so would the very high rate of interest “in the shortest possible time.”

Albayrak believes that the government’s selling of basic foodstuffs at discount stores took its toll on the food prices as they have halved in February compared to January and he thinks they would come lower supported by seasonal conditions in food production and base effects.

What was more interesting among his arguments besides the single-digit inflation claims that while Turkey would post a current account surplus in 2019 Turkey’s growth would also turn positive.

To this rosy picture he was painting, Albayrak made another addition saying that the painfully high unemployment rate (12.7%, on seasonally adjusted terms) would soon turn to recovery as the initial indicators on the Turkish economy pointed at a very strong recovery.

Albayrak said credit growth in Turkey was also returning and had increased by 43.5 billion liras ($8 billion) in February while roughly 70 billion liras of “hot money” has also entered the country in the first 2.5 months of the year.

The minister’s optimistic claims about the Turkish economy which is suffering one of the most drastic recessions of a few past decades must have roots in the upcoming nationwide local elections on March 31.

Yet, the true picture is far from what Albayrak has tried to outline.

To begin with; Turkey suffered a severe currency crisis last year with almost 30% of lira devaluation which pushed the consumer price inflation up to 25.2% last October.  In reaction, the central bank’s benchmark interest rate was carried up to 24% in oder to contain lira’s free fall.   Along with such devaluation, as the heavy external debt payments of the private sector turned investments negative; the meltdown in consumers’ purchasing power amidst lira’s extreme weakness and very high interest rates numbed domestic consumption.

President Erdogan’s desire to meddle in the Turkish economy’s daily routine in a such a way that contradicts with the very basics of the economy- ie. interest rates being the cause of inflation-shied foreign investors away at a time when the Fed was going full throttle at monetary tightening.

With Turkey’s savings ratio falling very short of funding investments needed for growth, Turkey stands out as an emerging market economy dependent on foreign financing.  As proved by solid data, when Turkey’w GDP growth was at 7.4% in 1Q18, Turkey’s currency account deficit to GDP ratio was very high at 6.0%.

Coming back to Albayrak’s claims of success that as the government they had done a “very good job” in turning the current account deficit to current account surplus for 2019; the truth is very bitter.  That is, they had in fact did such a job with Turkey’s economy management with delaying a top-down program to address the real problems; Turkey’s economic contraction in the 1H19 is set to be sharper than what was envisaged by the AKP ranks.

Thus, along with the severe economic contraction which went deeper due the AKP government’s “ad-hoc crisis management” measures; the current account balance will turn positive this year.  And this will be among the most tangible signs reflecting the severity of Turkey’s economic contraction.

Under normal circumstances, with the level of savings in the Turkish economy, each time Turkey’s economic growth gains momentum so does the currency account deficit.

Yet, while the GDP growth is set to remain in the negative territory for 2019 to a tune of at least 2% shifting current account deficit to surplus; the last quarter of 2019 could as well see positive GDP growth thanks to the base effects when 4Q18 GDP was down by 3%.

The combination of having a whole year current account surplus hand in hand with positive GDP growth in the final quarter of 2019 thus is far from a “success story” in the government’s ranks.  In fact, it is rather meaningless when the GDP growth is set to remain below Turkey’s assumed potential growth rate of 5.5% for the coming few years. No need to say, Minister Albayrak’s vision for a rapid decline in the unemployment rate will not come true; in fact there is room for further worsening before it gets better-and better only on a very slow trend as the GDP growth beyond 2019 is likely to be weak within 2-4% range.

Albayrak’s outlook for inflation also is very different from what the central bank has been calling for. The central bank also expects inflation on a downward trend though on a slower pace underlining ongoing risks to price stability.  Such as tax cut reversals, food prices, further lira depreciation and the pressures from a much higher production price inflation at above 30%.  In fact, the food price inflation is designated to remain above the headline CPI inflation, not only with the deep rooted problems existing on the food chain but also and mostly because of the production related problems as the Turkish farmers in the survival mode amidst the very high production costs, low productivity and many layered structural problems existing in the agriculture sector.

Hinting about a rapid decline in the rate of interest that has been guarding lira would only make things worse if the fears of a premature rate cut from the central bank due to pressures from the government resurfaces.

All in all, what Albayrak told about the Turkish economy yesterday, is not even close to the harsh economic environment taking its toll in Turkey during 2019.  The government’s reckless spending ahead of the local polls in less than two week’s time that has almost mho or limited impact on growth will only make things harder down the road as the fiscal discipline was the remaining anchor that kept the Turkish economy at bay during the troubled times.



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