If external conditions evolve in line with the assumptions I presented in the previous commentary, 2013 will be a better year than 2012 for Turkey in terms of the economy

Now it is the time to discuss how main macroeconomic indicators would develop in 2013 under the base scenario. The bottom line is if external conditions evolve in line with the assumptions I presented in the previous commentary, 2013 will be a better year than 2012 for Turkey in terms of the economy. In a nutshell, I think the 4 percent growth estimation of the Medium Term Program is realistic. But provided that the assumptions made in the base scenario are realized. Below I address the factors that will influence Turkey’s growth performance:

1- Export: I don’t expect the lira to depreciate in real terms. So, it will be the foreign demand what will shape the export performance. Turkey’s export markets will grow at a limited degree. Thus, I expect that export performance will recover only slightly and exports will make a relatively smaller contribution to growth compared to 2012.

Investment appetite will build up

2- Investment: Investment appetite will increase compared to 2012. With domestic credit growth restricted by the management of the economy, the support of credit supply on investments will not be higher than it was in 2012. Therefore, whether the rise in risk appetite will be translated as a rise in investments will depend on the degree at which foreign fund options grows. Under the assumption that a foreign exchange (FX) position by the corporate sector will not be prevented by a policy decision, we should expect a certain increase in investment expenditures, reinforced by the expectation that lira will not depreciate in real terms.

3- Consumption: Since domestic credit growth was restricted, the support of credit supply on consumption will not be higher than it was in 2012. Short-term interest rates have been declining since July and this was reflected partially on deposit rates. Within this picture, consumption by those who are not in need of a loan will increase. Consumption will invigorate more than investment.

4- Conclusion: Growth rate will probably be around or slightly above 4 percent. Unemployment will become rigid at rate around 9 percent or above. The recovery in the current account deficit should be expected to halt and inflation to settle around 6 percent.

5- Fiscal policy: There is no room to maneuver in support of growth, at least during the first half of the year.

6- Monetary policy: It is understood that the Central Bank (CB) believes that 4 percent growth is attainable should the current circumstances prevail.

It can therefore “tolerate” the inflation rate at around 6-7 percent unless an “extreme upwards trend” is observed in headline inflation and growth.

Within this framework, the CB will concentrate mainly on the potential upwards pressure on the lira. We should keep in mind that the CB has been loosening the monetary policy since early July. Therefore, there is just a small room to maneuver via the policy rate. If the upwards pressure intensifies, the CB will probably step up using several tools: first might be to reduce the average short-term interest rate to the lower limit of the interest rate corridor without changing the policy rate. A second option might be to draw some part of FX inflows off the market (by increasing the reserve options coefficient or raising the reserve requirements on FX deposits etc.). Third, it might directly purchase FX.

As you might have noted, I addressed fiscal and monetary policies after I presented conclusions. The reason is quite simple: given the current dynamics, 4 percent growth and 6-7 percent inflation rate seem attainable. If there appears a trend in the opposite direction, the economic policy will become more active. So, it’s time to address different scenarios next.

This commentary was published in Radikal daily on 22.12.2012