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Turkey Macro View: December 2013

Turkey's economic performance had been remarkable throughout the 2000s as well as it had been a shining light for many investors. Although the economy hit by 2008′s global financial crisis with a rapid but short-term contraction, Turkey was fast to find a way out of recession. The following two years, Turkey was the second-fastest growing economy after China, however, this time what questioned by economists was the overheating. At end of 2011, CAD, CPI and unemployment rates were slightly 10%, which led country to get a well-deserved membership of "the 10s club" , were also alarming. Given the macroeconomics conditions, it was inevitable for policymakers to take some measures to cool down the economy. 2012 data showed us Turkey grew by 2.2% with a reasonable CAD rate, also a sign for a successful soft-landing. Fed's bond-buying and zero interest rate policies run by other central banks in developed countries help Turkey to sustain its CAD but with Fed's hitting the brakes gets closer, more investors started to question the vulnerabilities of the economy.

In this article, my purpose is to question the taken measure for narrowing CAD. There has been procedures tried: The first one is depreciating Turkish Lira to support the exports, and the seconds is, putting more pressure on domestic demand by tightening the consumer lending conditions.

Let me start with the second procedure. Domestic consumption has been the main dynamic of the economy. To sustain the fast growth rates, it should be replaced by foreign demand where is taking us to the first procedure again.

Focusing on exports, depreciated Lira could help it to improve? Theoretically, it could, but, the picture numbers are giving us, differs from expected somehow.

Between 2003 and 2008, the exports averagely grew by 25% year over year where Turkish Lira gains, then, between 2009 and 2012 Turkish Lira depreciates against US Dollar, however the growth rates of exports was 5%, which had been 5 times faster when Turkish Lira appreciates. What is more, what we see is an absolute inverse relationship between the exports and the FX rate as of the midst of 2011.

In a world contingent to Fed, I prefer not to use real effective exchange rate which is calculated with the currencies of Turkey's exporters.

My intention is to say that, more diversified tool set should be used for preventing current account deficit from widening, such as structural reforms, trade agreements. On the side of reforming the structure of the economy, hope-inspiring signs are not still visible. Talking about trade agreements, Turkey's attempt to make an agreement for oil and gas leasing with Kurdistan is a crucial developments as well as Iran's welcoming the Western world. Even if hanging on by the eyelids is the true definition for political situation in Middle East, the shape of things to come may be profitable for Turkey.

An interesting story is about to written about Turkish economy.