Many developments that bear great importance in terms of the recent history of Turkish economy have taken place in February
The optimistic outlook that was in place in early February turned into a storm in February following Central Bank Governor Erdem Başçı’s announcement that the Central Bank might convene its Monetary Policy Council earlier than scheduled and reduce the interest rate. As pressure from politicians on Başçı to bring down the interest rate intensified during the month of February, the dollar rate soared to TL 2.50 from TL 2.33, upsetting many economic plans. The dollar hike also effectively deprived the Central Bank of its early-rate-reduction weapon. President Recep Tayyip Erdoğan in February made several harsh statements criticizing the bank for what he says is a high interest rate. This has led some to conclude that the political authority might take steps to end the autonomous status of the Central Bank.
As a result of tension brought about by the exchanges of remarks on the interest rate and Central Bank policies, the dollar rate, which was at around TL 2.33 rose to TL 2.45 in the latter part of the month, and the rate will likely stay at this level.
On Feb. 25, the Central Bank held its monthly monetary policy meeting, announcing a 0.25 point rate cut. Although many commentators stated that the tiny rate cut is the result of the Central Bank attempting to walk the thin line between appeasing the president and what it believes is right, the move has also clearly shown that Governor Erdem Başçı and his team will not introduce a significant rate cut unless the inflation rate falls to a desired level. Many economists confidently state that this was the last rate cut that the Central Bank will introduce for a long time.
Although a deal has been reached with Greece in the eurozone, it seems unlikely that the growth rate in Europe will reach to a desired level in a long time. The markets will also be continuing to monitor the US for a rate increase from the FED. But what exactly is ahead for Turkey’s economy as these developments take place? This question was tackled by economist and Bilkent University economy instructor Refet Gürkaynak and Boğaziçi University Economy Professor Burak Saltoğlu in a conference titled “2015 Macroeconomic Expectations”, organized by Yapı Kredi Portfolio in late February.
Turkey’s leading economy professors note that both political and economic risks – due to debts and the country’s high current account deficit – have become more pronounced over the past few years. The country’s top economists believe that 2015 will be a volatile year for Turkey, because of these risks.
Debt structure constitutes the core of risk
Gürkaynak noted that 2015 will be marked by both political and economic risks, while Saltoğlu said volatility in the exchange rate will likely continue this year.
Gürkaynak stated: “Previously, there were only concerns about political risks, but now, there is increasing concern that political and economic risks might merge and act in combination as a disruptive factor. 2015 will be a year of high-volatility.”
He noted that a major risk factor for Turkey is that the country has increasingly been shifting towards easy profits from construction instead of concentrating on industrial production to achieve growth. He also noted that household debt in Turkey is high, adding this also constitutes a fundamental risk. The debt level is a high risk factor, coupled with the volatility arising from the political establishment, according to Gürkaynak, who also noted that the economic fragility has made markets even more vulnerable in the face of shocks that might be coming from the political authority.
Exchange rate fluctuations likely to continue
Professor Saltoğlu noted that the price fall in oil prices has helped Turkey’s current account deficit and inflation figures a bit. He continued: “But the sharp fall in oil prices has stopped and the expectation now is that crude oil prices will start rising from this point on.”
Saltoğlu predicted that the inflation rate at the end of 2015 will be around 6-6.5 percent, while the growth rate will be between 3.5 – 4 percent. He said he expected the current-account-deficit-to-GDP ratio to be around 5 to 5.5 percent. He said: “The exchange rate movements will continue in 2015, fluctuating between 10 – 14 percent.” He also noted that in the banking sector, the credits-to-deposits ratio has risen to 115.4, a factor that should be monitored carefully as it constitutes a risk. He further noted that even if the default rate in the banking sector remains at around 7-8 percent, the provisions for credit losses remain very high, usually above the legally allowed levels. He noted that the high provisions might create the risk of an assets bubble. He also said an important factor this year will be the June elections, saying that foreign investors will be watching the elections closely as the outcome will decide under whose control the economy management will be in the second half of the year.
CB might give in to political pressure
Gürkaynak, who offered an analysis on the political pressure on the Central Bank to cut the interest rate, noted: “The inflation rate will likely fall in the first half due to the base effect as well as lower oil prices, but will likely go up in the second half. But the Central Bank might give in to the political pressures, especially at this year of elections.” He said the Central Bank plays a crucial role in keeping the inflation rate down, but said laying other responsibilities on the Central Bank is not right.
Saltoğlu offered a comparison of Governor Başçı’s performance with that of previous Central Bank governors. He said that former Central Bank Governor Süreyya Serdgençti’s percentage of deviation from the inflation target was 0 percent, while Durmuş Yılmaz’s deviation rate was about 68 percent. Başçı’s performance marked a 56 percent deviation from the target inflation rate. Saltoğlu said under the three Central Bank governors the real interest rate have been 13.75, 5.38 and 0.38 in the order of succession of the three governors.
