Careful readers might recall that I warned here about the probable poor performance of the central government budget in December. As a matter of fact, in December alone, there was a gigantic 16.1 billion-Turkish Lira deficit mainly due to high capital spending. However, despite this outlier, the central government budget produced a 39.6 billion-lira deficit in 2010 (3.6 percent of gross domestic product), pointing to a better performance than the revised official estimate of 44.2 billion liras (4 percent of GDP) deficit. It can also be seen as a relative success in today’s world full of debt and budget problems.
On the other hand, economy officials have long said they would allocate the strong revenue performance especially to investment expenditures rather than saving it. Therefore, the deterioration in the budget was well-telegraphed and came even later than envisaged. In my opinion, it is related to the aim of the full utilization of 2010 appropriations. In other words, the steep advance in expenditures is a result of a year-end factor and does not imply a permanent acceleration. However, for many analysts this was an excuse for changing the rate cut call by citing the Central Bank’s possible caution after these results. Although I give more weight to the “on hold” decision, I do not see any impact from that factor on the Central Bank verdict, as the Central Bank probably has the knowledge of this spending increase beforehand.
For the outlook of fiscal discipline going forward, I still think the strong economic activity should keep supporting the revenues side of the budget. The official target for the 2011 year-end budget deficit of 2.8 percent implies some narrowing in the budget deficit, which is currently at 3.6 percent. However, this improvement is planned to be backed by higher privatization revenues and lower interest payments. This means neither tightening nor loosening in the fiscal discipline in 2011 compared to 2010.
When doves cry
By the time I wrote today’s article, the markets were anxiously waiting for the Central Bank decision. The Central Bank had cut rates by 50 basis points at last month's meeting and many analysts had been pricing in a further cut initially. However, those expectations have waned over the last weeks as the lira has weakened and a majority of analysts think rates will remain on hold. While expectations of no change in the policy rate have been the main theme lately, a contradicting decision is not totally ruled out. Whatever the decision, the Central Bank should make sure that it will not be perceived as “dovish” this time. Gov. Durmuş Yılmaz also acknowledged this by saying: "I don't want to leave this impression that the Central Bank is aiming at a monetary policy of easing. That is not the case. The target that the bank wants to reach is a tighter monetary policy," during a Euromoney conference in Vienna on Tuesday. Yılmaz also said the Central Bank cut interest rates last month to curb the inflow of hot money into the economy and added that its policies were aimed at reducing domestic demand.
Mind the unemployment gap
As a lagging indicator of economic recovery, the unemployment rate continued to come down to levels not seen since October 2008. According to the latest data available, the unemployment rate declined to 11.2 percent, and in the non-farm sectors to 14.1 percent, from 13 percent and 16.4 percent a year ago. While this sharp decline is related to a crisis-hit base term, seasonally adjusted figures also show that the labor market conditions recovered from their weak performance in the previous months. The leading indicators, like consumer and real sector confidence and industrial production, suggest that the economic activity is to strengthen in the fourth quarter of 2010. Thus the labor market conditions will likely improve going forward. However, this would not be strong enough to cause any wage pressure, bearing in mind the still-high unemployment rate and population growth rate of 1.1 percent. Before the global crisis, the long-term unemployment rate average was around 10 percent. That is to say, there is still room for improvement before the full closure of the unemployment gap.
21 Ocak 2011 Cuma
14 Ocak 2011 Cuma
Central Bank in the center of volatility...
The mood in the financial markets has turned decidedly sour over the last few weeks amid a welter of disappointing economic news from around the world. The U.S. is in the center of this pessimism – first the home sales data and then the non-farm payrolls surprised on the downside and erased hopes for an early recovery in the U.S.
In the EU, weak growth outlook persists, accompanied by debates over the feasibility of a credible post-crisis mechanism. It seems that the volatility in the markets would likely remain high or even get higher due to both global and local developments. Globally, the weak recovery pace in developed markets would likely be of main concern. Locally, the Central Bank of Turkey’s new monetary policy toolbox to fulfill the dual mandate of low inflation and financial stability would add to the short-term uncertainty and thus the general volatility. For instance, currently the market is mostly expecting a 50 basis point cut at the next meeting of the Monetary Policy Committee, or MPC, on Jan. 20. However, it doesn’t seem to be a done deal, bearing in mind the currency depreciation recently.
As I’ve mentioned here before, policy rates currently appear to be a function of the short-term fund flows, thus the fluctuations in the level of currency should also be considered. The portfolio inflows have slowed down in December and there seems to be a global risk aversion tendency, which is pushing the currency rates higher in Turkey, beyond some very important technical resistance levels. If this tendency is to be preserved till the next Monetary Policy Committee meeting, then the Central Bank may opt to wait a bit longer before cutting rates further. If really it is the case, the Central Bank may preserve this tool for the times when the portfolio inflows intensify and lead to sharp currency appreciation.
On the other ingredient of policy mix, namely the reserve requirement ratio, the Central Bank relies on this old-fashioned tool to slow down the credit growth, which is considered to be highly correlated with the current account deficit. While the consensus expectation for the deficit points to 6.2 percent of GDP in 2010, the Central Bank says that the credit growth should be limited to 25 percent in order to attain a current account deficit level of 5.4 percent of GDP in 2011. The current trend of credit growth is at 40 percent and it would definitely necessitate more reserve requirement rises in order to attain such a slowdown. So I expect the Central Bank to hike the reserve requirement of foreign exchange liabilities this month (more on short-term liabilities again), but also consider more rises on Turkish Lira liabilities in the following months.
Permanent bears
In November, the current account deficit hit a record $5.9 billion. Also, the 12-month cumulative deficit increased to $44.9 billion, from $40.8 billion in the previous month. I expect that the deficit will continue to expand, reaching $46.6 billion in 2010 (6.2 percent of GDP). In my opinion, for an energy-hungry country the deficit is structural and Turkey is no stranger to large current account deficits. However, although I have been following the Turkish economy for many years, I still do not understand the real cause of concern of some market pundits. Is it the deficit, its financing or the quality of financing? This time they put forward the dominance of short-term portfolio inflows in the financing of the current account deficit as a cause of concern. But I remember very well that the same pundits were worried in 2008 as well when the financing was coming from long-term items such as foreign direct investment and long-term loans. Now I understand that there is no way to dispel all worries of some pundits because they are permanent bears.
Early signs of pre-election spending?
Early indicator of the budget performance, The Treasury’s cash-based budget produced a bulky 11.2 billion-lira non-interest deficit in December. The surge in the non-interest expenditures was the key reason behind the weak performance. However, this was not uncommon, as every December points to similar expansion in expenditures. Besides, based on these cash figures, the central government budget deficit to GDP ratio would be slightly above 3 percent in 2010, much below the revised official estimate at 4 percent in the Medium Term Fiscal Program.
In the EU, weak growth outlook persists, accompanied by debates over the feasibility of a credible post-crisis mechanism. It seems that the volatility in the markets would likely remain high or even get higher due to both global and local developments. Globally, the weak recovery pace in developed markets would likely be of main concern. Locally, the Central Bank of Turkey’s new monetary policy toolbox to fulfill the dual mandate of low inflation and financial stability would add to the short-term uncertainty and thus the general volatility. For instance, currently the market is mostly expecting a 50 basis point cut at the next meeting of the Monetary Policy Committee, or MPC, on Jan. 20. However, it doesn’t seem to be a done deal, bearing in mind the currency depreciation recently.
As I’ve mentioned here before, policy rates currently appear to be a function of the short-term fund flows, thus the fluctuations in the level of currency should also be considered. The portfolio inflows have slowed down in December and there seems to be a global risk aversion tendency, which is pushing the currency rates higher in Turkey, beyond some very important technical resistance levels. If this tendency is to be preserved till the next Monetary Policy Committee meeting, then the Central Bank may opt to wait a bit longer before cutting rates further. If really it is the case, the Central Bank may preserve this tool for the times when the portfolio inflows intensify and lead to sharp currency appreciation.
On the other ingredient of policy mix, namely the reserve requirement ratio, the Central Bank relies on this old-fashioned tool to slow down the credit growth, which is considered to be highly correlated with the current account deficit. While the consensus expectation for the deficit points to 6.2 percent of GDP in 2010, the Central Bank says that the credit growth should be limited to 25 percent in order to attain a current account deficit level of 5.4 percent of GDP in 2011. The current trend of credit growth is at 40 percent and it would definitely necessitate more reserve requirement rises in order to attain such a slowdown. So I expect the Central Bank to hike the reserve requirement of foreign exchange liabilities this month (more on short-term liabilities again), but also consider more rises on Turkish Lira liabilities in the following months.
Permanent bears
In November, the current account deficit hit a record $5.9 billion. Also, the 12-month cumulative deficit increased to $44.9 billion, from $40.8 billion in the previous month. I expect that the deficit will continue to expand, reaching $46.6 billion in 2010 (6.2 percent of GDP). In my opinion, for an energy-hungry country the deficit is structural and Turkey is no stranger to large current account deficits. However, although I have been following the Turkish economy for many years, I still do not understand the real cause of concern of some market pundits. Is it the deficit, its financing or the quality of financing? This time they put forward the dominance of short-term portfolio inflows in the financing of the current account deficit as a cause of concern. But I remember very well that the same pundits were worried in 2008 as well when the financing was coming from long-term items such as foreign direct investment and long-term loans. Now I understand that there is no way to dispel all worries of some pundits because they are permanent bears.
Early signs of pre-election spending?
Early indicator of the budget performance, The Treasury’s cash-based budget produced a bulky 11.2 billion-lira non-interest deficit in December. The surge in the non-interest expenditures was the key reason behind the weak performance. However, this was not uncommon, as every December points to similar expansion in expenditures. Besides, based on these cash figures, the central government budget deficit to GDP ratio would be slightly above 3 percent in 2010, much below the revised official estimate at 4 percent in the Medium Term Fiscal Program.
7 Ocak 2011 Cuma
What happens if everyone expects the same thing in an economy?...
When I look at several macro scenarios for the Turkish economy in 2011being depicted by different financial institutions, I barely notice any difference. It looks as if optimism is finally the predominant attitude toward the economy, thanks to self-confidence-boosting developments in the Turkish economy during and after the global crisis. The averages of forecasts are also similar to my forecasts, which I presented here on Dec. 17, 2010.
Let me summarize the macro outlook:
1) GDP growth is likely to be at least 5 percent, probably in the broad range of 5.5 percent to 6.5 percent. 2) Headline CPI inflation will remain within the 6 percent to 7 percent range, after hitting the 4 percent to 5 percent range in the first quarter. 3) Current account deficit is likely to expand to $50-$55 billion range, depending on growth forecast, from an estimated $45 billion in 2010. 4) The fall in unemployment is likely to continue but with reduced momentum. The yearly average unemployment rate will remain around 11 percent, better than 2010 but significantly above pre-crisis levels. 5) Budget deficit and non-interest balances are likely to improve further despite the general elections likely to be held in June. 6) There is a big chance the Turkish economy could be upgraded to investment grade in 2011. Such a rating would improve Turkey’s risk profile, bolstering long-term loans and foreign direct investment.
However, the convergence of views does not make me more comfortable. I still wonder whether this big consensus is really healthy. Actually, it means every market player is on the same side and this limits market fluctuations. It is definitely good for financial stability, but it also makes positions more exposed to macro data surprises in both directions.
On the other hand, there is certainly less consensus about financial indicators, especially the Central Bank policy rate path – although most analysts expect further rate cuts in the short-term. In that context, the first edition of quarterly inflation report from the Central Bank, due Jan. 25, will help shape a base scenario for the direction of rates in the medium-term on the policy horizon.
Yet another threshold from ratings agencies...
Could a rating upgrade be a Central Bank mission? Ratings agency Fitch thinks so. A Fitch Turkey analyst said Monday that Turkey's Central Bank faces a challenge to reduce inflation, prevent overheating and limit the current account deficit, and its success in managing this will feed into its rating assessment.
It is not an easy task. Though the headline consumer price index, or CPI, closed last year at 6.4 percent, below the year-end target of 6.5 percent, and I expect it to fall further to around 4 percent at the end of February – mainly due to favorable base effects generated by last year’s administrative (tax) price increases. However, from then on, the real challenge will be to keep the CPI below or around the 2011 target of 5.5 percent. In that context, the key variables are oil, unprocessed food prices and Turkish Lira depreciation (or appreciation). The first two are exogenous, but the last one will be tied to the monetary stance of the central bank. The easier the stance, the bigger the upward pressure on depreciation. Consequently, it is good for the current account, but not for inflation.
What is good for the country may not be good for the banks...
On the other side of the ledger, easy money could fuel a lending boom. In 2010, total growth in bank lending reached 30 percent. Moreover, the ratio of change in credit volume to GDP jumped by 11 percent. The Central Bank sees the difference between the system’s credit and deposit growth as a proxy to the private sector savings gap.
According to its calculations, all else (public sector savings gap, FDI and portfolio investments) being equal, a rise of 5 percentage points in the credit growth rate will increase the current account deficit by 2.1 points in any given year. Therefore, another strong growth spurt, as many bank CEOs aimed for in their 2011 plan, would make the CBT’s plan ineffective. That was the main motive behind the Central Bank’s warning to all banks to curb credit expansion to a level (at most 25 percent) consistent with macroeconomic targets of the Medium Term Program.
Let me summarize the macro outlook:
1) GDP growth is likely to be at least 5 percent, probably in the broad range of 5.5 percent to 6.5 percent. 2) Headline CPI inflation will remain within the 6 percent to 7 percent range, after hitting the 4 percent to 5 percent range in the first quarter. 3) Current account deficit is likely to expand to $50-$55 billion range, depending on growth forecast, from an estimated $45 billion in 2010. 4) The fall in unemployment is likely to continue but with reduced momentum. The yearly average unemployment rate will remain around 11 percent, better than 2010 but significantly above pre-crisis levels. 5) Budget deficit and non-interest balances are likely to improve further despite the general elections likely to be held in June. 6) There is a big chance the Turkish economy could be upgraded to investment grade in 2011. Such a rating would improve Turkey’s risk profile, bolstering long-term loans and foreign direct investment.
However, the convergence of views does not make me more comfortable. I still wonder whether this big consensus is really healthy. Actually, it means every market player is on the same side and this limits market fluctuations. It is definitely good for financial stability, but it also makes positions more exposed to macro data surprises in both directions.
On the other hand, there is certainly less consensus about financial indicators, especially the Central Bank policy rate path – although most analysts expect further rate cuts in the short-term. In that context, the first edition of quarterly inflation report from the Central Bank, due Jan. 25, will help shape a base scenario for the direction of rates in the medium-term on the policy horizon.
Yet another threshold from ratings agencies...
Could a rating upgrade be a Central Bank mission? Ratings agency Fitch thinks so. A Fitch Turkey analyst said Monday that Turkey's Central Bank faces a challenge to reduce inflation, prevent overheating and limit the current account deficit, and its success in managing this will feed into its rating assessment.
It is not an easy task. Though the headline consumer price index, or CPI, closed last year at 6.4 percent, below the year-end target of 6.5 percent, and I expect it to fall further to around 4 percent at the end of February – mainly due to favorable base effects generated by last year’s administrative (tax) price increases. However, from then on, the real challenge will be to keep the CPI below or around the 2011 target of 5.5 percent. In that context, the key variables are oil, unprocessed food prices and Turkish Lira depreciation (or appreciation). The first two are exogenous, but the last one will be tied to the monetary stance of the central bank. The easier the stance, the bigger the upward pressure on depreciation. Consequently, it is good for the current account, but not for inflation.
What is good for the country may not be good for the banks...
On the other side of the ledger, easy money could fuel a lending boom. In 2010, total growth in bank lending reached 30 percent. Moreover, the ratio of change in credit volume to GDP jumped by 11 percent. The Central Bank sees the difference between the system’s credit and deposit growth as a proxy to the private sector savings gap.
According to its calculations, all else (public sector savings gap, FDI and portfolio investments) being equal, a rise of 5 percentage points in the credit growth rate will increase the current account deficit by 2.1 points in any given year. Therefore, another strong growth spurt, as many bank CEOs aimed for in their 2011 plan, would make the CBT’s plan ineffective. That was the main motive behind the Central Bank’s warning to all banks to curb credit expansion to a level (at most 25 percent) consistent with macroeconomic targets of the Medium Term Program.
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