Fatih Özatay, PhD - [Archive]

Not back to the salt mines yet 01/09/2012 - Viewed 1833 times

Heavily discussing latest ECB and FED decisions, Turkey will come and go back to the salt mines.

The school year is starting next week. Ankara will liven up soon. Economic developments and statistics that will double the joy are also around the corner: only a few hours after the time I am writing these lines, Federal Reserve (FED) President Bernanke will be speaking at the Jackson Hole. Will he announce a quantitative easing? On September 6^th, the European Central Bank (ECB) will hold its awaited meeting. Will the ECB pull a rabbit out of the hat or continue empty talks as to how “the euro will survive.”  Later on September 12^th, Germany’s Constitutional Court will reach a verdict on Germany’s law against the European Stability Mechanism. Will the court grant an injunction or not? On September 12 and 13, the FED will be holding a meeting, which will be followed by a press meeting with Bernanke.

Important statistics

Heavily discussing latest ECB and FED decisions, we will come and go back to the salt mines as a number of important statistics on the Turkish economy, including the GDP for the second quarter, will be announced. The first one, foreign trade statistics, was already announced yesterday which will evaluate in detail later. For today, let me stress that non-gold export performance of Turkey has been weak for some time now. Annual rate of export growth in the last four months were 0.6 percent, -0.6 percent, 6.3 percent and 3.1 percent, respectively. Evidently, figures adjusted to the fluctuations in the euro-dollar exchange rates give healthier results; but the non-adjusted data gives an idea at glance. Since December 2011, only in two months non-energy exports increased year-on-year: May and July. And the rates of increase were low. In short, it is all quiet on the trade front and nothing new on the implications on growth rate. Meanwhile, the TURKSTAT announced the initial estimations on plant production for the year: cereal production is expected to decrease while fruit and vegetable production is expected to increase year-on-year. These indicate that in the second and third quarter, growth will be slightly lower than what industrial production figures implied. 

How will FED’s decisions affect Turkey?

While you are reading this column, Bernanke’s will have delivered his awaited remarks; but I have to submit my column before then. One of the main reasons why financial markets pay so much attention to this year’s Jackson Hole conference is that Bernanke had announced the second quantitative easing during the conference in 2010. Should the FED introduce the third quantitative easing, this might have clear implications for Turkey’s economy. Let me address these, first neglecting the circumstances in Europe. Under the assumption that the status quo in Europe remains intact, we can directly conclude that a new quantitative easing will enhance the risk appetite in financial markets, which clearly means that capital inflow towards Turkey and peer countries will improve. This will put a downwards pressure on exchange rates and increase the access of the corporate and banking sectors to borrowing. As a result, banks’ willingness to increase the credit supply will strengthen, overall creating a picture similar to that in the second half of 2010.

This will bring two opposing forces on inflation. On the one hand, the upwards trend in the value of the lira will lower costs and thus the inflation rate. On the other hand, depending on the rate of credit supply growth, domestic demand will pick up and push inflation rate upwards. For a quite long term, the cost effect will prove stronger. Credit expansion will probably make a positive contribution to growth, halting the easing of the current account balance and hence pushing up the current account deficit. If the circumstances in Europe go downhill, the mentioned effects might weaken or not take place. Otherwise, the potential effects will strengthen.

This commentary was published in Radikal daily on 01.09.2012