What is the scale of the Turkish economic problem?

Recently I watched a BBC Four documentary series on the House of Osman or as we call it the Ottoman Empire which extended into south-east Europe as well as around the Mediterranean into North Africa. Now we associate it with decline and the phrase “young Turks” which oddly seems to have given inspiration to Rod Stewart but back in time it was a thriving Empire managing to rule parts of the world that we now consider not only as hot-spots but maybe too hot to handle. Now we find that the subject of a possible empire is in the news yet again.

Investors have been unnerved by Mr Erdogan’s decision to place his son-in-law in charge of the economy brief while sidelining familiar and respected former ministers. ( Financial Times)

Promoting family members is something of an in thing as is some of the language used.

Berat Albayrak, who is also Mr Erdogan’s son-in-law, said the central bank would be effective “like never before” and promised to bring soaring inflation down into the single digits “in the shortest time possible”.
“Speculation about the independence and decision-making mechanisms of the central bank is unacceptable,” he added. “A central bank that is effective like never before will be one of the fundamental aims of the policies of the new era.”

He failed however to use the trump card of a “bigly”. Of course the Financial Times somehow still manages to believe in central bank independence whereas we abandoned such thoughts years ago. Whilst the example below is admittedly extreme the theme is familiar.

Turkey’s central bank announced three interest rate rises during the campaign for June 24 elections, with a cumulative total of 500 basis points. The bank’s benchmark lending rate stands at 17.75 per cent.

So up,up and indeed up and away whereas the rhetoric is rather different. This is Hurriyet Daily News quoting President Erdogan on the 11th of May

“My belief is that interest rates are the mother of all evils. Interest rates are the cause of inflation. Inflation is a result, not a cause. We need to push down interest rates,”

As we wonder if Bank of England Governor Mark Carney was taking notes it is time to switch to the economic impact of all of this. The first factor we have already noted which is an interest-rate of 17.75% which is out of kilter with the economic times by some distance. As opposed to the -0.4% of neighbouring Greece or the 0.1% of Israel if we look the other way. So a break is being applied.

The Exchange-Rate

We can switch quickly to this as we know we only get rises in interest-rates like this if the national currency is in what Taylor Swift would call “trouble,trouble,trouble”. The latest Central Bank of Turkey minutes puts it somewhat euphemistically.

exchange rate developments

Or as the Hurriyet Daily News puts it.

The lira weakened to a record low of 4.9767 against the dollar late on July 11. The currency opened the July 12 trading at around 4.83 against the greenback.

The lira has shed nearly 25 percent of its value against the U.S. currency so far this year.

If we look at the pattern we see that the rate has been heading south for some time as five years ago it was at 2.04. However an acceleration started at the end of April when it was 4.05. Or returning to Ms Swift.

And the haters gonna hate, hate, hate, hate, hate

If we stay with financial markets there is a familiar sequence of responses to this.

Fall-out from Turkey’s tumbling lira hammered banking shares on July 11, sending the Istanbul stock market to its biggest one-day fall in two years.

The main share index dropped more than 5 percent while bank stocks lost 9 percent in their worst day for five years.

The yield on Turkey’s benchmark 10-year bond rose to 18.48 percent from 17.36 percent at close on July 10.

Central bankers will be panicking at all the negative wealth effects here. Care is needed as in such volatile circumstances markets ebb and flow quickly although it has mainly been ebb. Also the official interest-rate and bond yield numbers remind me of my analysis of how to deal with a foreign exchange crisis on May 3rd. If you think that a currency is collapsing then even ~18% interest-rates do not help much and even worse via forward or futures calculations it makes it look like the currency will drop even further. At some point investors will think things have stabilised and especially in these times will pile in for a juicy yield but when?

I’ll never miss a beat, I’m lightning on my feet

The trouble is that in the meantime you have slammed the brakes on your domestic economy.


This is a consequence of the lower currency as the price of imported goods and services rises. For a while existing contracts may be a shelter but then it hits home.

In May, consumer prices rose by 1.62 percent and annual inflation increased by 1.30 points to 12.15 percent. The uptick in inflation spread across subgroups in this period ( CBRT)

Last week we learned that the CBRT was right to expect more bad news.

Inflation rose to 15.39 percent year-on-year, the highest annual rate since 2004 after a new method of calculating price rises was introduced, and month-on-month CPI inflation leapt to 2.61 percent – nearly double the forecast in a Reuters poll.

It looks set to go higher still.


Whilst a lower currency boosts an economy as price competitive exports and imports respond this takes time. Before they do you are actually in a worse situation as your imports cost more as the J-Curve and Reverse J-Curve entwine. Thus we get this.

According to the data released on July 11, the current account deficit rose to $5.9 billion in May from $5.4 billion in the corresponding month last year, with a nearly 9.6 percent year-on-year increase. ( Hurriyet Daily News)…….The country’s 12-month rolling deficit reached $57.6 billion in May, the data also showed.

This compares to these.

Turkey’s annual current account deficit in 2017 was around $47.3 billion, compared to the previous year’s figure of $33.1 billion.


Much of this feels like the UK in the 1970s although to be fair Turkish inflation it has yet to hit the 26.9% seen in the summer of 1975. A sharp brake has been applied to the economy via the higher cost of imports and via higher interest-rates. If we move to the business sector there will also be an impact from this.

The Turkish energy sector is facing an increasingly unstable situation with a rapidly declining lira making it impossible to repay billions of dollars’ worth of loans accumulated over the past 15 years.

Since 2003 $95bn has been invested into the country’s energy sector, of which $51bn remains to be paid. This figure represents 15% of the $340bn owed by non-financial companies in overseas liabilities, according to data from the nation’s central bank. ( Power Technology)

This is also familiar as countries which are in danger of trouble make it worse by borrowing in a foreign currency because it is cheaper in interest-rate terms. After all what could go wrong? It is also reminiscent of the foreign currency mortgage crisis of parts of south-eastern Europe. At least they did not borrow in Swiss Francs.

A recession is a danger as this hits and we will have to wait and see what develops but as to the talk of plenty of measures that sounds a little like capital controls to me. However the official view echoes Ms. Swift again.

I shake it off, I shake it off
I shake it off, I shake it off




What is the outlook for the economy of Turkey?

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.

‘s Nowotny says rising 10yr yields are a ‘success story’ (h/t )

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…..

Economic Output

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.

Retail Sales

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

Number Crunching

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.