Turkish Economy: Latest Indicators – January 2014
British Consulate General Istanbul
Turkish Lira continues to fall, current account deficit to rise. Central Bank leaves headline interest rates unchanged. Budget deficit falls.;. 2014 is likely to be a challenging year for Turkey’s economy.
Despite the long-term potential of Turkey, 2014 looks set to be a difficult year for the economy. This report looks at the latest indicators in a fast-moving economic situation.
On 21 January, the Turkish Lira (TL) dropped to a new low of 2.27 to the USD, before stabilising at 2.24, down 10% since 17 December. Analysts predict it will fall further, possibly to 2.4 by mid-year.
The Central Bank of Turkey continues to sell USD in support of the TL rather than raise interest rates. On 21 January, the bank’s monetary policy committee announced that they would not raise rates, but would increase the interbank rate on extraordinary days from 7.75% to 9%.
Finance Minister Mehmet Simsek has argued that the combination of a weak TL and a recovery in the Eurozone is good for Turkey and will help bring down the current account deficit (CAD). On January 14, the CBRT released figures for the first eleven months of 2013 showing a deficit of $55.9bn, higher than the year-end figure for 2012.
In a note on 16 January, a leading bank said the TL’s depreciation would continue unless interest rates were raised and that the Turkish economy was “headed for stagflation”. The Central Bank says consumers now hold $69bn worth of FX, up 10% on 2012; the media speculate that this is driven by the need to protect savings.
According to one leading analyst the artificial capping of interest rates iss hitting bank profitability in Turkey. Some banks are only breaking even and those with large numbers of credit card customers (to whom banks are unable to pass on actual credit financing costs) are making losses. One bank has downgraded its growth forecast for Turkey in 2014 from 3.1% in December to 2.2% in January. If the TL drops by a further 20-30%, analysts argue, this will do major damage to company balance sheets.
By contrast, a representative of a major Turkish holding company shrugged off the market turbulence, telling us that Turkish companies were used to dealing with uncertainty. Analysts say the ability of Turkish companies to deal with currency devaluation depends on the degree to which they can hedge on dollar or euro income. The situation may, therefore, be better for larger companies with hard currency income than for smaller companies.
On 15 January the Ministry of Finance released Turkey’s budget figures for 2013. The budget deficit was TL 18.4bn, well below the target of TL33.9bn. The budget deficit to GDP ratio fell to 1.2%, the third lowest figure since 1985. Analysts attributed this to strong revenue growth, driven by increased taxes combined with high domestic demand.
After a month of negative news for the Turkish economy, the public spending figures are a tonic for the Government. But the macroeconomic picture for the next few months remains challenging; and there is a risk that the slide in the TL will begin to feed through into inflation, while putting increasing pressure on company balance sheets.
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