The Turkish problem is one of high interest-rates and inflation with a weak Lira

by Shaun Richards

Sometimes it is a challenge as to how to start an economic analysis. But the Turkish central bank did that for me on the 23rd of September.

The Monetary Policy Committee (MPC) has decided to reduce the policy rate (one-week repo auction rate) from 19 percent to 18 percent.

The first impact in these times of low interest-rates is of an interest-rate well into double-digits.That is reinforced by the fact that Turkey does quite a bit of trade with countries ( the Euro area for example) that have negative interest-rates.So if you are dealing a year ahead there was an interest-rate differential of the order of 20% Next comes the fact that even by central banking standards this is a pretty extraordinary explainer.

Strong recovery in global demand, high course of commodity prices, supply constraints in some sectors and rise in transportation costs have led to producer and consumer price increases internationally. Unfavorable effects of weather conditions in major agricultural commodity exporting countries are observed on global food prices.

It would work much better if interest-rates have just gone from 18% to 19% not the other way around. It is reinforced by this bit.

Recent increase in inflation has been driven by supply side factors such as rise in food and import prices and supply constraints, increase in administered prices and demand developments due to the reopening.

Inflation is certainly on the march according to Turkstat.

A rise in general index was realized in CPI (2003=100) on the previous month by 1.25%, on December of the previous year by 13.04%, on same month of the previous year by 19.58% and on the twelve months moving averages basis by 16.42% in September 2021.

The food and drink sub-index rose by nearly 29% so it will be difficult times for Turkish workers and consumers. The target is quite some distance away to say the least.

The CBRT will continue to use decisively all available instruments until strong indicators point to a permanent fall in inflation and the medium-term 5 percent target is achieved in pursuit of the primary objective of price stability.

The Turkish Lira

In a world of inflationary pressures with energy prices to the fore you might think that at best the interest-rate move above was risky.Next you would look at the exchange-rate and anyone with any experience of looking at the Turkish Lira would do so with quite a bit of trepidation

Across the world, one of the few central banks who are easing rates amid rising inflation is the CBRT. And after depreciating over 20% YtD, the Turkish lira is close to breaking $9.0 – and yet it has more downside. ( @macrocredit )

There is a nuance with the level of interest-rates but the plunging currency keeps the inflation pressure on at a time when we are seeing commodity and energy price rises as it is.Then there is the question of who is running the show?

Bankers said the lira weakness was due in part to a Reuters report citing sources who said President Tayyip Erdogan was losing confidence in the central bank governor on monetary policy direction.

Regular readers will recall the past claim of President Erdogan that lower interest-rates lead to lower inflation which leads directly to suspicions that it was her who decided to lower them in September. Also if you are the central bank Governor you might be grateful for the sack which is better than being shot.

According to Ahval the opposition have spotted an opportunity here from a clear consequence of a weak currency at a time of inflation.

The leader of Turkey’s main opposition party on Sunday warned against looming price hikes ahead of winter, while urging the government of President Recep Tayyip Erdoğan to create a fund to soften its effects on the population.

Kemal Kılıçdaroğlu made the remarks in a video message he posted on Twitter, in which he highlighted the steep price increases to food in Turkey in recent months.

The position against the Euro is not quite so clear cut but the 10.33 today does compare to below 4 not much over 4 years ago.

Balance of Trade

This should in these circumstances be the territory of the J-Curve.This is where trade initially gets worse because the terms of trade shift immediately but it takes a while for output and volumes to respond. Looking at the incessant declines in the Lira Turkey is seeing a succession of J-Curves.

This morning’s official release tells us this.

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According to the provisional data, produced with the cooperation of the Turkish Statistical Institute and the Ministry of Trade, in August 2021; exports were 18 billion 916 million dollars with a 51.9% increase and imports were 23 billion 175 million dollars with a 23.6% increase compared with August 2020.

This looks initially hopeful with export growth far exceeding the import one.But monthly figures are erratic and comparing with 2020 has its issues.

In January-August 2021 period, exports were 140 billion 195 million dollars with a 36.9% increase and imports were 169 billion 975 million dollars with a 25.5% increase compared with January-August 2020.

So it looks as though there has been an export response which is logical.

In August 2021, the main partner country for exports was Germany with 1 billion 575 million dollars. The country was followed by USA with 1 billion 313 million dollars, United Kingdom with 1 billion 194 million dollars, Iraq with 939 million dollars, and Spain with 839 million dollars.The ratio of the first five countries in total exports was 31.0% in August 2021.

Turkish exports are more competitive in Dollars, Euros and Pounds.

The problem comes when the inflation caused by the currency decline feeds and at the moment it will be added to by energy and commodity price rises. That may be being shown by this from HurrietDailyNews earlier. The story stays well.

Turkey‘s automotive production, including light commercial vehicles, tractors, and automobiles, amounted to 921,619 units during the first nine months of this year, an association report said on Oct. 11…….Automotive industry exports also increased by 24.5% to $21.7 billion on value basis. The sector exported 671,674 vehicles during the nine-month period.

But then hits more recent trouble.

In September, auto production decreased by 24.7% on an annual basis to reach 107,029 units.


The central bank was also quite upbeat about the economy.

Leading indicators show that domestic economic activity remains strong in the third quarter, with the help of robust external demand. The acceleration of domestic vaccination rollout facilitates the recovery in services, tourism and related sectors, which have been adversely affected by the pandemic, and leads to a more balanced composition in economic activity.

The latest official economic growth figures are below.

Seasonally and calendar adjusted GDP with chain linked volume index (2009=100) increased by 0.9% compared with previous quarter.

But there is a problem highlighted by this.

GDP increased by 52.4% and reached 1 trillion 581 billion 120 million TRY at current prices.

These are numbers that have literally been inflated and there is a race in Turkish Lira to pay Peter before the inflation Paul turns up. That is illustrated by the way we also get numbers in US Dollars.

GDP realized 188 billion 566 million US Dollars in the second quarter of 2021.

Returning back to the Turkish Lira position GDP was 186.3 in the second quarter which is hopeful compared to the 100 of 2009. But it was 203.8 at the end of 2020. So there are a lot of forces pulling in different directions in the economy and GDP will be hard to measure anyway with such large currency and price changes.

Trade trends look hopeful but there are other catches in addition to the usual can they keep running ahead of the inflationary input costs? The numbers show this.

In August 2021, according to economic activities, the ratios of manufacturing industries products, agriculture, forestry and fishing, mining and quarrying in total exports were 95.1%, 2.3%, 1.9%, respectively.

The supply crisis must be hitting here. Then there is the issue of higher energy costs paid for with an ever lower Lira. Sometimes by companies who have borrowed in US Dollars. So it is a complex mix.



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