Global Investing

Can Turkey confound the pessimists again? The numbers say no

February 3, 2012

Doomsayers have been prophesying Turkey’s economic boom to deflate into bust for many months now. The recent revival in positive investor sentiment worldwide ar has helped silence some voices. Others say it is a matter of time. 

Data on Friday showed annual inflation accelerated from last year’s 3-year highs to 10.6 percent in January. It is likely to remain elevated at least until May, analysts predict. And trade data released this week indicate Turkey will likely have finished last year with a current account gap of around 10 percent of GDP last year — the biggest of any major developing economy. All this appears to indicate that the central bank will have to keep monetary policy tight and might even have to even raise rates, should the current resurgence in risk appetite fade. But rather optimistically, the government is still forecasting 4 percent growth this year. The IMF says 0.4 percent is more likely. A report today by Capital Economics, entitled “Turkish boom hits the buffers”, says recession is a cinch.

Neil Shearing, the report’s author, notes that imports of both consumer and capital goods have fallen by around $1 billion over a 12-month rolling period. That indicates a contraction in private consumption and fixed investment, he writes. Some of this could of course be down to the lira’s weakness last year, that aided some import substitution, Shearing acknowleges. But he says that all signs are that:

A combination of tougher external conditions and tighter domestic monetary policy have caused a two-year boom in Turkish domestic demand to come shuddering to a halt. Our base case is for a fresh bout of risk aversion to cause the lira to hit 1.90 per dollar over the next six months, causing interest rates to spike — and the Turkish economy to contract by 1 percent this year 

With so large a deficit, Turkey will always remain hostage to the ebb and flow of global risk appetite.  But the country has regularly confounded pessimists.  The past month has seen the government as well as corporates return successfully to international bond markets, bringing much-needed dollars into the country. The lira has rallied 7.5 percent since the start of the year, recovering more than a third of last year’s losses. Should this continue, inflation will ease and financing the current account deficit will be less of a problem.  But many suggest the lira’s days of strength could be numbered — JP Morgan analysts for instance suggest taking profit on some long lira positions. Turkey’s influential export lobby has already started complaining about the lira’s rise, they note.

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