Fatih Özatay, PhD - [Archive]

Turkey’s position in the world growth volatility league 18/02/2012 - Viewed 1341 times

For the 2000-2010 period, the volatility of growth in Turkey is higher than that in 130 of 184 countries.

Forecasting is a technical issue. Estimates are made upon a predicted model which runs according to certain assumptions. These include, among others, the barrel price of crude oil, the policy rate set by the Federal Reserve (FED), whether or not the European Central Bank (ECB) will introduce a quantitative easing, or whether or not domestic tax rates will be changed. Different scenarios can be set based on particular combinations of these variables. For instance, if you are to estimate growth and if your model tells you that risk appetite is chief among external indicators which affect growth, you can construct different scenarios by keeping tax ratios and the price of crude oil constant and assuming alternative policies by the FED and the ECB. Next, you can seek for alternative growth rates for the period ahead. 

Errors are inevitable

In short, forecasts have to be “conditional” and based on different scenarios. It would be weird otherwise. Here is an extreme example: assume that you are an umbrella producer and you asked your advisor what the level of umbrella sales will be the next year. Your advisor responded, “It will definitely pick up by 10 percent.” You dug it up, “But on the basis of what?” The answer you get would most likely be like, “I expect that it will increase somehow.” I think it is clear what you have to do in response: hire another advisor who knows how to associate long-term weather forecasts with umbrella sales.

Of course, errors are inevitable when it comes to making forecasts. In fact, errors might prove remarkable in some cases. Even the direction of movement might be forecasted wrongly, the magnitude of the movement aside. Obviously, such errors in forecasts depend on the extent your which model is “correct.” Still, even if the model is “correct”, economic uncertainties might lead to errors in your forecasts. Making forecasts is relatively harder in countries where the economy is highly volatile, in particular. 

Volatility rising

The table below shows average growth, volatility (standard deviation), which refers to the measure of deviation of annual growth from periodic average, and the volatility coefficient, which corresponds to the deviation divided by the average. Here, larger the coefficient is, larger the deviation of growth above or beyond the average will be. The last raw gives Turkey’s position among 184 countries ranked in ascending order by their volatility coefficients.

Two points attract attention. First, Turkey’s growth is highly volatile. Second, volatility has assumed an upwards trend. For the 2000-2010 period, the volatility of growth in Turkey was higher than that in 130 of 184 countries. Here is one of the main reasons for this: with the liberalization of capital movements in 1989-1990, Turkey’s economy has become highly sensitive towards fund inflows. The Turkish economy has been achieving high growth in periods of strong fund inflows and vice versa. Risk appetite of foreign investors is the main determinant of fund inflows apart from the domestic economic circumstances. And for 2012, risk appetite is closely associated with the steps the FED and the ECB are to take as well as the developments in Europe. The circumstances about Europe in particular are highly uncertain. It has always been difficult to estimate Turkey’s growth. But it will be even more difficult in 2012.

This commentary was published in Radikal daily on 18.02.2012