Listen to this article
Give us your feedback
Thank you for your feedback.
What do you think?
The Turkish lira continued its rally against the US dollar on Monday after the country’s statistics office said the economy had grown by a corking 11.1 per cent in the third quarter, easily beating polls of analysts by Reuters (which predicted 10 per cent growth) and Bloomberg (8.5 per cent).
Yet the lira hardly leapt out of its blocks. Its 1 per cent gain on Monday morning brought its rally against the dollar to 3.6 per cent from a low on November 28. But it is still over 10 per lower against the dollar from its recent peak in September, and has lost more than a quarter of its dollar value since April last year.
Eleven per cent GDP growth is only good news up to a point. Even if Turkey’s economy is demonstrating surprising resilience in the face of adversity, as Hatice Karahan, President Recep Tayyip Erdogan’s chief economic adviser, put it to the FT, investors still worry, for a number of reasons. Here are three of them.
The first is the quality of growth. On the positive side, says Timothy Ash of BlueBay Asset Management, are healthy public finances, a strong banking sector and a “pro-business, entrepreneurial culture”. Turkey, he says, “wants to grow”.
On the negative side are the consequences of driving growth with fiscal largesse and cheap credit. “There has been too much stimulus,” says Mr Ash.
The government has emphasised the contribution of investment to third-quarter growth. But it is coming from a very low base. Consumption has played a much bigger role. As a result, inflation is running at 13 per cent, far ahead of a 5 per cent target. The current account deficit, which ballooned to nearly 9 per cent of GDP after the global financial crisis, had recovered to 3.4 per cent by the beginning of last year. Yet it is expanding again and reached 4.7 per cent of GDP in the third quarter.
Turkey is dangerously exposed. Inan Demir of Nomura expects the country’s need for external finance to reach $43bn at the end of this year. Added to this are repayments on foreign debts coming due in the next 12 months amounting to $170bn. “These are very large sums,” says Mr Demir. Turkey’s ability to service its debts, he says, will come down to the ease of global liquidity conditions. “If interest rates in core markets remain low, it should be able to roll over it debts. But if core market yields rise, Turkey will be the first to be punished.”
The second worry concerns what comes next. One big feature of growth this year was a credit guarantee fund for small and medium sized companies giving government backing to loans worth almost TL250bn ($65bn). But the fund is almost exhausted. Even if the government wanted to expand it, banks have no more capacity to lend, says Atilla Yesilada of GlobalSource Partners, a consultancy.
The government talks of new stimulus programmes next year for strategic sectors of the economy. Mr Yesilada, for one, is sceptical. “The traditional tools are exhausted,” he says. “They need some new magic tricks.”
The third worry concerns Mr Erdogan. “This has become a huge problem for everyone interested or invested in Turkey,” says Mr Yesilada. “Turkey has never been a decentralised policymaking country but, since the referendum [in April, granting increased powers to the president], the policymaking mechanism has been increasingly concentrated in Erdogan’s persona,” he says. “Each day it gets worse. We don’t know who he listens to.”
It may be in recognition of this that Ms Karahan has been pushed forward as the public face of economic policy. Even government critics praise her for her excellent credentials and her level-headed grasp of the challenges facing the country. “Nobody has a bad word to say about her,” says Mr Ash. Ms Karahan plays down the frequently-voiced concern at Mr Erdogan’s notorious tirades against an ill-defined “interest rate lobby”.
“It is a fact that he is disappointed by high interest rates because he wants to encourage investment,” she says. “But he is also concerned about inflation and wants it to be reduced as quickly as possible.” She also dismisses concerns over the degree of independence at the central bank. “That debate has gone beyond its rational borders,” she says. “If the central bank was not independent, how would it have tightened by 400 basis points this year?”
Ironically, Ms Karahan’s assurances may be one more reason to expect the central bank to follow recent government guidance and raise rates aggressively at its eagerly awaited policy meeting on Thursday. Just don’t expect the lira to go wild in response.