Fatih Özatay, PhD - [Archive]

How is the atmosphere lately? 15/09/2012 - Viewed 1723 times

The recent upward trend in foreign fund inflows to Turkey will continue and maybe strengthen to some degree.

On Thursday I said that I will write on the steps that Turkey can take amid the current economic slowdown. But I will put this discussion over to Tuesday as two developments that can affect Turkey’s options came out. The two-day meeting of the Federal Reserve (FED) ended on Thursday evening. It was followed by a press conference by FED Chairman Ben Bernanke. His remarks are of critical importance as they will determine the shape of the world economy in the near future. The second one, though significantly less important than the first one, gives insights about the current state of the Turkish economy: automotive industry statistics for August.

Domestic demand will be boosted

FED has announced two important decisions. First, federal fund rates that have been kept at low levels around 0-0.5 percent will be warranted until mid-2015, earliest. Previously, end of 2014 was declared as the earliest data to end the low fund rate policy. Second, FED announced additional purchase of mortgage-backed securities at $40 billion each month. The purchases will continue on an open-ended term until unemployment decreases at a satisfactory pace. Together with existing policy to sell short-term securities and purchase long-term securities, FED will be purchasing longer-term securities of about $85 billion each month until the end of the year.

The purpose here is to lower long-term interest rates, increase financial asset prices, housing prices to begin with, and improve the confidence in the US economy. The rises in housing and stock prices are expected to enhance consumer wealth. This, coupled with the announcement that the FED will continue doing its utmost and keep interest rates at low levels until the mid-2015 and the resultant improvement in the confidence in the economy are expected to boost domestic demand. Moreover, with the increase in house prices, the FED expects to encourage house purchases and thus to stir the housing sector.

In short, the FED is doing its utmost to stimulate domestic demand. During the conference, Bernanke stressed that existing problems cannot be solved solely via monetary policy and implied that fiscal policy efforts must complement the monetary policy efforts. From this perspective, I would like to draw your attention to the risk I highlighted yesterday: in 2013, the debt ceiling issue will rise back. If the upper limit is not raised, US will have to lower budget deficit at the wrong time. The second risk underscored by Bernanke is about the developments in Europe.

The latest news from the automotive sector is not good, however. Here are some striking developments: in the first seven months of the year, both exports and imports decreased significantly year-on-year. In August, the drops in exports and output were even sharper while imports showed an increase. These are valid for the automotive sector and others at the same time. The upwards trend in imports indicate that domestic demand is reviving. The acceleration of the weakening of exports however profoundly affects the automotive sector.  This implies that until Europe recovers, Turkey’s export performance will be weak, affecting growth adversely.

Therefore, concerning the economic policy response Turkey should give, we must take into account the following points in the context of this week’s developments: first is that, as was in the first half of the year, Turkey’s economy in the third quarter is growing at a pace significantly below its potential. Second, the contribution exports made to growth in the first half might decrease gradually. Third, currently it is not possible to boost domestic demand via fiscal policy efforts. Fourth, in the context of the latest decisions by the European Central Bank (ECB), the FED and German court of constitution, international risk appetite will be higher than it was for the last two months until the debt ceiling debate rises back on the US agenda. In other words, the recent upward trend in foreign fund flows to Turkey will continue and might strengthen to some degree, unless an adverse shock hits, of course.

This commentary was published in Radikal daily on 15.09.2012