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.
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