122/09/2010PEI Turkey Forum 2010, İstanbul Macroeconomic Stability and Growth Perspectives of the Turkish Economy Prof. Dr. Seyfettin Gursel Betam, Director.

122/09/2010 PEI Turkey Forum 2010, İstanbul

Macroeconomic Stability and

Growth Perspectives

of the Turkish Economy

Prof. Dr. Seyfettin GurselBetam, DirectorBahçeşehir University Center for Economic and Social Research


Outline

I. Strong recovery

II. Can high growth be sustainable?

II.a- High growth is sustainable in the short run

II.b- Low growth regime in the medium term

III. Long term growth perspectives


I. Strong recovery

Consumption driven recovery

Investment followed with one quarter lag

Inventory changes played a crucial role

Fiscal stance remained tight

Net Exports returned to its structural negative contribution

YoY Growth and Contributions

-25%-20%-15%-10%-5%0%5%

10%15%20%

2007

(1)

2007

(2)

2007

(3)

2007

(4)

2008

(1)

2008

(2)

2008

(3)

2008

(4)

2009

(1)

2009

(2)

2009

(3)

2009

(4)

2010

(1)

2010

(2)

Government spending InvestmentConsumption Inventory investmentNet exports GDP


I. Strong recovery

Very strong start but rapid decrease of QoQ growth

Sudden acceleration from Q1 to Q2

Seasonally Adjusted (SA) QoQ Growth

-8%-6%-4%-2%0%2%4%6%

2007

(1)

2007

(2)

2007

(3)

2007

(4)

2008

(1)

2008

(2)

2008

(3)

2008

(4)

2009

(1)

2009

(2)

2009

(3)

2009

(4)

2010

(1)

2010

(2)


I. Strong recovery

Two facts should be pointed out about 2nd quarter growth

1) Fiscal stance has been relaxed

2) Contribution of Net Exports turned positive

(a temporary reversal?)



Yes, in the short run (6 to 9 months), because; Political stability is secured

Consumption will be increasing following its structural growth path

Private investment will be encouraged by high growth perspectives and increasing capacity utilization.

Enough room for fiscal expansion

No change in Central Bank policy interest rate is expected and Istanbul Stock Exchange (ISE) is expected to follow an increasing trend.


II.a- High growth is sustainable in the short run Political stability is secured A strong “Yes” (58%) in the 12th of September Referendum

suggests that AKP government will maintain its majority in the parliament after the general elections, expected to be held in May-June 2011

Indeed, a 9 percent difference between AKP and CHP votes in the elections is enough to secure a majority to AKP in the parliament.

Surveys estimate AKP votes to be around 40% and CHP votes to be around 28% at best.

Strong recovery is filling AKP’s sails.

Threats to AKP’s ruling that stemmed from the Army and the High Court is out of agenda -- at least in the medium term.


Deposit Money Banks Credit Stocks (% of GDP)

0

2

4

6

8

10

12

14

16

18

20

Corporate Credits Consumer Loans and Individual Credit Cards


Consumer Confidence Index

60

70

80

90

100

110

120

There is still room for consumer confidence to get stronger

Political stability perspective is likely to boost consumer confidence

Credit crunch is over, credit availability is increasing, thanks to strong capital inflows

Consumption will follow its structural growth path, moving upward




Capital Flows (except FDI)

-5000

-3000

-1000

1000

3000

5000

7000

Jan-0

5

Mar

-05

May

-05

Jul-0

5

Sep-0

5

Nov-05

Jan-0

6

Mar

-06

May

-06

Jul-0

6

Sep-0

6

Nov-06

Jan-0

7

Mar

-07

May

-07

Jul-0

7

Sep-0

7

Nov-07

Jan-0

8

Mar

-08

May

-08

Jul-0

8

Sep-0

8

Nov-08

Jan-0

9

Mar

-09

May

-09

Jul-0

9

Sep-0

9

Nov-09

Jan-1

0

Mar

-10

May

-10

Jul-1

0

(mill

ion

$)


Average real consumption growth between 2003 (1) and 2010 (2) is 3.9 %.

Consumption growth is expected be arround 4 % for the next few quarters.




II.a-High growth is sustainable in the short run

Capacity utilization is still low, but rapidly recovering

Investors’ confidence came back.

Political stability perspective is likely to boost investor confidence

Credit crunch is over, credit availability is increasing, thanks to strong capital inflows

Strong recovery of private investment will continue



1. Public debt ratio will be decreasing

2. Strong increase in tax income due to high growth & moderate increase expenditures

Allows for a limited amount of electoral spending in 2011

Enough room for fiscal expansion: 2 remarks should be pointed outCentral Government Primary Balance

(12-month rolling million TL)

-2000

8000

18000

28000

38000

48000

Jan-05

May-05

Sep-05

Jan-06

May-06

Sep-06

Jan-07

May-07

Sep-07

Jan-08

May-08

Sep-08

Jan-09

May-09

Sep-09

Jan-10

May-10

(million TL)

2010 Target

Realization

(Jan-Aug, ‘10)

Budget Deficit 50187 14387

Primary Surplus 6563 20899

Public Debt Ratio

42.5%39.9%

46%

40%40%

45%

51%

57%

62%

69%

74%

47%

Realized Predicted



No, not in the medium term (1 to 2 years)

Because of weaknesses in two macroeconomic fundamentals; inflation and current account balance

Price stability is not achieved yet

Structural current account deficit (CAD) can reach unsustainable levels due to energy price hikes

A low growth regime (~4%) is very likely in the medium term



The inflation gap between Turkey and developed countries is still high (~5%) as well as the nominal interest rate differential

Price stability is not achieved yet


II.b-Low growth regime in the medium term

Structural current account deficit is widening with increase in energy prices, except during recessions

CAD can reach unsustainable levels due to energy price hikes


0

50

100

150

200

250

300

350

400

Comperative Risk Premiums (CDS, 5 years)

Turkey Brazil Poland Hungary


Exchange rate risk is low, as well as default risk

CAD can reach unsustainable levels with the appreciating TL

Capital inflows cause an appreciation in TL (stability paradox)

Appreciation of TL causes imports to increase and exports to decrease by eroding Turkey’s competitiveness,worsening the CAD.

17

Turkish industry suffers from low competition power due to

Relatively developed welfare state (high labor costs)

Bad quality of tax system (indirect tax weight too high, no room for cost reduction)

Insufficient high tech content of exports (poor human capital at average)

TL prone to appreciation (stability paradox)

CAB adjustments done through exchange rate shocks, lowering average growth rate




Low growth is unavoidable because, Domestic demand driven growth will reach its limit closing the

output gap; so TRCB policy rate will start to increase.

As long as price stability is not achieved monetary policy will be tight and interest rate differential cannot be reduced; so “hot money” inflows, appreciating TL, will be the main tendency.

Until the price stability is reached, exchange rate cannot be used as a competitiveness tool; so Net Exports’ contribution to growth will remain negative.

Widening CAD will provoke an exchange rate shock, sooner or later causing more pressure on the interest rates.

A severe correction of ISE ballooned by high growth optimism is very likely to occur after general elections.



Let’s make three remarks before discussing the structural issues of growth,

Low growth (~4%) is sufficient for moderately increasing equity values

But not sufficient for social cohesion as unemployment and poverty would be increasing

Also, not sufficient for rapid catch up with EU, making Turkey less attractive and more problematic for membership

Political instability risk would be increasing.



In order to put Turkish economy on its potential growth path, estimated at 5-6%, one needs the realization of two basic factors

Making Turkish industry more competitive

Profiting from the opportunity offered by energy rich neighbors



Making Turkish industry more competitive needs: Cost reducing reforms (labor market, energy saving, market efficiency..)

Productivity enhancing reforms (education, R&D)

Policies to develop new brands and new goods to export

A more stable real exchange rate

A powerful government within a stable democratic regime



Beside competition reforms, a complementary way to reduce the CAD and increase growth is to have an export boom to Russia, Iran and Iraq.

Profiting from the opportunity offered by energy rich neighbors


Long term growth perspectives

This export boom involves political as well as strategic issues;

Partly out of control of Turkey

(embargo on Iran, stability of Iraq)

Partly implying very painful and risky strategic choices for Turkey

(How to do strategic partnerships with these countries without loosing EU perspective and Nord Atlantic Alliance)


Thank you

122/09/2010PEI Turkey Forum 2010, İstanbul Macroeconomic Stability and Growth Perspectives of the Turkish Economy Prof. Dr. Seyfettin Gursel Betam, Director.

Documents

b low growth regime

contributionscds ulkelersource

social research

short runii

quarter laginventory

crucial rolefiscal stance

tightnet exports

stanbulmacroeconomic