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Net inflows to Turkey, which averaged a monthly $10 billion in the first four months of the year, declined to one fifth in the following five months
About a month and a half ago, on November 23rd, I wrote a commentary titled Confessions (1). It was about a piece I had written back in the late 2012 which presented my baseline scenario for the Turkish economy in 2013. I said that the scenario did not involve any particular reference to the Federal Reserve’s (FED) third quantitative easing that considerably affected the Turkish economy starting in May 2013. So I added “It is time for self-criticism. But please hear my version of story first and then decide. To be continued soon.” Actually it is quite weird that “soon” came only a month and a half later, especially given that I write three pieces a week. Anyways, here it goes.
The baseline scenario for 2013 I presented in the late 2012 assumed that the two major risks for 2013 were the US falling off the fiscal cliff and hence launching a fiscal contraction before the economy could recover, and Europe falling back into a crisis. The third risk was about the uncertainties concerning Syria. But the FED unexpectedly declared in May 2013 that it could start within the year gradually tapering the third quantitative easing launched by the late 2012.
It was clear by the FED’s own remarks that the policy rate will not be increased before the end of 2014. It was also known that the liquidity generously injected with the first quantitative easing initiated right after the global crisis was to be withdrawn under a moderate scheme following the interest rate raises. These were already in the knowledge cloud which was available before 2103, when we were constructing our scenarios. The gradual tapering of the third quantitative easing, however, came a bit as a surprise. I am not trying to justify my assumptions, though. That’s the reality.
As far as I know the FED’s declaration in May 2013 and the following decision were not anticipated by anyone; neither in Turkey nor in the rest of the world. In this line, many commentators expected that the Turkish economy will grow by around 4 percent in 2013. So were my expectation and the official growth estimate. After the FED’s declaration, however, net capital inflows towards emerging countries with high current account deficit started to decline. Net inflows to Turkey, which averaged a monthly $10 billion in the first four months of the year, declined to one fifth in the following five months. As a result, exchange and interest rates hiked. But despite this unfavorable development which has not reckoned in, the official estimate of 4 percent will most probably hold. So, how was that possible?
I could identify three reasons: first is that public expenditures stepped in to compensate for weak private investment and consumption. In the first half of the year, the economy grew predominantly thanks to the leap in public sector consumption and investment. This was not anticipated. Second, the administration had announced that credit growth would be limited at 15 percent and this was taken into account in the official GDP growth estimate. But credit growth was realized at a much higher rate. Third, the negative effect of the FED’s decisions on investments will be gradual and come to be felt in 2014.
Of course there is the 17 December incident to take into account. The terrifying strange details that unveiled following the scandal have once again, but this time more evidently, validated the state of the rule of law in Turkey. And they will clearly have critical negative effects on the economy particularly if they keep on growing…
This commentary was published in Radikal daily on 02.01.2014