The source of growth in 2019 will be foreign demand

Published 14.09.2018 23:21

With regards to the "economic war" over "trade" and "exchange rate-parity" channels triggered by the U.S., countries have accelerated steps to soften or eliminate the effects of the U.S.' open and implicit economic sanctions with a series of countermeasures.

First of all, the depreciation of local currencies against the U.S. dollar can be defined as a development that undermines the U.S. advantage in the "trade" war. The compelling aspect of this process for Turkey was what the Turkish business world got caught in, the "trade" and "exchange rate" war, at a high "open position." This is why, there has been a debate over the last few months between the Turkish banking sector and the real sector on the "deposit deficit" for foreign currency denominated credits, and it is necessary for us to get through this global war – without driving the relationship between the real sector and the banking sector to a breaking point – with a "win-win" formula for both sides following the arbitrage and initiative of the public authority.

At this point, the Medium Term Program (MTP), which is expected to be announced with a new name and new content, will lay out necessary measures on how the Turkish economy will be stabilized following a road map over the next three months for the rest of 2018 and particularly in 2019. The business world is wondering how the economic management will balance the exchange rates, interest rates, inflation and current account deficit through the MTP. Having said that, a loss in acceleration in growth over the third and the fourth quarters should not be surprising with regards to the "seasonal" and "temporary" uncertainty caused by the "global economic war," the critical slowdown in private sector investment expenditures, and the tendency of our citizens to move toward savings due to high exchange rates and high interest rates.

As stated by Treasury and Finance Minister Berat Albayrak, despite the moderate slowdown in consumption and investment, the engine of growth in the second quarter was domestic demand. In addition, it is also critically important that net external demand have a positive contribution to growth with the strong performance of export and tourism revenues.

As the Turkish economy, as of the third quarter, will go through at least six to seven quarters of a "stabilization period" and as noted by Minister Albayrak, the leading economic indicators for the third quarter show that the "balancing period" has begun. Albayrak, for this period, emphasizes the importance of progress in the direction of "export-led growth," one of the main objectives of the "stabilization" period. The positive-directional effect of the tight stance in fiscal policy supported by structural reforms, while the decrease in imports of raw materials, intermediate goods, investment goods (machinery) and consumption goods due to the relative decrease in domestic demand increased the contribution of net foreign demand in growth, on price stability (inflation rate) and financial stability (current deficit) will take Turkey to a path of sustainable growth.

Synchronized measures with a bazooka approach

Taking into account the serious disruption in the habits of the real sector and the financial sector in price determination, the Central Bank of the Republic of Turkey (CBRT) took a decision to increase the interest rate by 6.25 points – which I foresaw as a step-by-step increase – as a step in order to give a strong message to the market. The deterioration in the price determination habits in the real sector shows itself with exorbitant price increases even in products that are not produced with imported raw materials or intermediate products due to the "opportunity" dimension. This is why the Trade Ministry has included such excessive price increases into "commercial deception" and intensified controls. The disturbance in the price determination habits in the financial sector, banking, leasing and factoring areas reached such an extent that even though the annual wholesale price index (WPI) inflation was 19 percent – resources such as revolving credits to the real sector are being offered at interest rates starting from 30 percent in various financial models, going up to 40 percent, 42 percent or even 50 percent. The real sector naturally fires back at this level of resource utilization costs of financial institutions.

It seems that the CBRT wanted to respond to the attacks over the last two to three years with regards to its local and global perception and to the imputations that it does not have "vehicle independence" with such a strong step. In fact, such hard and effective steps by the CBRT or the economic administration are called a "bazooka approach" in economic literature. The aim is to create an effect similar to the effect of a bazooka gun on the market. This step will, undoubtedly, seriously slow down growth with respect to the fact that it will have a net impact on household consumption expenditures in a very restrictive way, encouraging households to save more as well as on private sector investment expenditures as a "postponing" dimension. Its impact on employment will also be negative. It is a must that growth receives support from outside demand, that is, from the positive impact of export and tourism revenues.

However, the more essential requirement is the fact that the Monetary Policy Board increasing the interest rate of the fundamental monetary policy by 2-3 percentage points over the expectations will reverse the trend of inflation in a short period of time. Thus, as the annualized WPI inflation starts to rapidly decline, the CBRT will decrease the negative effect of this rate of increase in interest rates on growth, employment, production and investments by quickly decreasing monetary policy interest rates. This is why, in order for CBRT's firm step to ensure a downward trend in inflation at most in three months, it should be the priority for a package of fiscal policy and direct control policy measures to simultaneously come into effect with CBRT's bazooka approach. For this purpose, the new MTP will provide answers to many questions. Dollar supporters are right at a decision step. Another coup will accelerate sales in foreign currency.

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