It is not that often that Turkey makes the news headlines. Mostly if it does it is a reflection of the troubles on and at its borders or in a more economic sense movement in its currency the Turkish Lira which has been volatile in recent times. However the setback for the ruling AK Party as the election results came in has certainly stirred up the financial markets this morning. The first impact has been on the Turkish Kira which has fallen heavily. From Bloomberg.
Turkey’s lira weakened to an all-time low……..The currency tumbled as much as 5.2 percent…….The lira dropped the most since October 2008 on a closing basis to 2.8096 per dollar.
Okay so we get the message there and the Turkish equity market has had better days too.
The Borsa Istanbul 100 Index sank 8.2 percent at the open of trading.
So it was a very bad weekend to be holding Turkish equities if you are a foreign investor as your price falls are exacerbated by the currency fall. Just to make a grim triple-play you will probably not be surprised to read that the bond market fell as well.
The yield on the 10-year government bond jumped 55 basis points to 9.87 percent, the highest since September 2014 on a closing basis.
So we immediately learn one thing which is that bond yields in Turkey are much higher than what usually passes as “normal” in these times. Even Portugal with its troubled debt path only has a ten-year yield just nudging 3% or less than a third of the Turkish level. Mind you according to the Governor of Austria’s central bank Ewald Nowotny it is apparently Turkey which is better off.
No doubt when yields were falling he considered that to be a success too! I somewhat doubt whether eitherTurkey or Turkish investors agree with him in his latest comments.
The Turkish Lira
Central bankers do not like to highlight the fact that their currency has fallen so the TCMB (Turkish central bank) puts it thus in its monthly analysis.
recently elevated volatility in the exchange rates…… the recently-elevated volatility in exchange rates.
Usually such talk is a sign to be afraid and to be very afraid! Actually the Turkish Lira has been on a mostly downwards path for some time. It passed 1.5 to the US Dollar in late 2010 then passed 2 in the late summer of 2013 and opened 2015 at 2.35. So we fear inflation and also note that much of the beneficial effect of falling oil and commodity prices has been lost.
As pointed out above a falling exchange-rate is a close bedfellow of problems with inflation so let us look at the TCMB numbers from Friday.
In May, consumer prices rose by 0.56 percent, pushing the annual consumer inflation upwards by 0.18 points to 8.09 percent.
This of course is unusally high for these times and both Turkish workers and consumers will rue the latest trends.
the contribution of the energy group and core goods to annual CPI inflation increased by 0.24 point and 0.30 point, respectively in May. The food group added 0.41 point less to the annual CPI inflation compared to April, yet remained the pioneering contributor to consumer inflation with 3.10 points.
So just as they get a little relief from food price inflation they find energy prices rising.If we move to another basic necessity which is water the picture is even worse.
municipal water prices remained on the rise and the annual inflation in this sub-group maintained its high course with 17 percent.
There is also not much of a get-out clause for the central bank in core inflation.
Annual core goods inflation increased by 0.83 points to 5.88 percent.
Also the inflationary trend is noticeable in producer prices which have been falling heavily in many parts of the world.
Domestic producer prices rose by 1.11 percent month-on-month and the group’s annual inflation climbed to 6.52 percent in May.
These are as shown below.
One-week repo rate at 7.5 percent
This provides plenty of food for thought. For example the nearby Euro area has a headline interest-rate of -0.2% which provides a difference of 7.7% in return over a year. Such a size of gap indicates the exchange-rate problem as investors need quite margin and remember the Euro itself has fallen overall in recent times. If we move to the domestic position then I do have an issue with the TCMB saying this.
tight monetary policy stance
World inflationary trends have turned and even before today’s developments the Turkish Lira had been falling so policy was in fact loose. Also the TCMB has been cutting interest-rates since the recent peak of 10% in January 2014 with the latest cut from 7.75% happening on the 21st of January. Mind you the TCMB can do a good line in goobledygook.
The ongoing cautious monetary policy along with prudent fiscal and macroprudential policies…..
We get to the truth of why the TCMB has cut interest-rates when we look at the trends here which show a slowing from the average of more like 4 to 5%.. If we look at the GDP numbers we see that inflation was a big problem in 2014 too.
GDP at constant prices. increased by 2.6% in the fourth quarter of 2014 and reached to 32 billion 104 million Turkish Liras. GDP at current prices increased by 9.8% in the fourth quarter of 2014 and reached to 446 billion 366 million Turkish Liras.
So 7.2% inflation on this measure but what is happening now?
This morning’s industrial production numbers were flat on a monthly basis but did show a response to a lower currency when compared to 2014.
Calendar adjusted industrial production increased by 3.8% compared with the same month last year.
However the Markit business surveys show a completely different picture.
Turkish goods producers cut output in May, continuing the trend shown every month in 2015 so far……. New orders fell for the fifth month running, albeit at the slowest rate over this period, with the same trend evident for new export orders.
Today’s update suggests that there is growth to be found here too.
Seasonal and calendar adjusted retail sales volume with constant prices increased by 0.3% in April 2015 compared with the previous month……..Calendar adjusted retail sales volume with constant prices increased by 3.8% in April 2015 compared with the same month of previous year.
Trade is a problem
You might think that the tourism industry would mean that Turkey would have a strong trade position whereas in fact the situation is troubled. From Turkish Statistics.
in April 2015; exports were 13 billion 392 million dollars with a 0.2% increase and imports were 18 billion 358 million dollars with a 11.1% decrease compared with April 2014.
So we see the impact of the fact that imports are more expensive although there was very little pick-up in exports. Actually April flattered with its 0.2% increase as so far in 2015 Turkish exports have fallen by 5.7%.
This means that Turkey has exported just over 50 billion Lira of goods but imported some 70 billion Lira.
There is much to consider here and something of a reminder. After all high inflation combined with trade issues have been a regular feature of the British economic landscape. They did not do us any good with the word stagflation appearing rather regularly. One feature of that period was interest-rate rises as a policy response and as an emergency measure the TCMB may be considering that although for it this would represent an embarassing about turn. It could also intervene to bolster the exchange-rate but when it tried that in early 2014 funds flowed out very quickly.
So we have an economy which has chosen economic growth as its policy aim and it has ignored inflation and trade issues. What does it do if growth slows now? A weak currency is not the best environment for an interest-rate cut. Also ominous is the fact that Turkey was receiving international praise a couple of years ago which is usually a harbinger of trouble. World Bank Group President Jim Yong Kim from October 2013.
Turkey’s economic achievements are an inspiration for many other developing countries
Today’s example comes from the UK CBI (Confederation of British Industry) which feels that it can predict economic growth to an accuracy of 0.1%!
The UK’s leading business group is forecasting 2.4% growth for 2015 and 2.5% in 2016. That represents a slight downgrade compared with February’s forecast of 2.7% and 2.6% respectively.