Merry Xmas and A Happy New Year

Well, a Merry Xmas and a Happy New Year to all my readers. Thank you for taking the time and trouble to pass-by. This blog will now - failing major and surprising new developments in the global economy - be offline till the end of the first week in January, or till after the festival of Los Reyes Magos in Spain (for those of you who know what this is all about). Come to think of it, maybe this is just what our ever hopeful central bankers are in need of even as I write - some surprise presents from the three wise men - but I fear that this year if these worthy gentlemen do somehow show at the next G7 meet, the star in the east which draws them will not be the one described in the traditional texts, but in all likelihood the rising star of India.



Credit crunch, did someone use the expression credit crunch?

Turkey CPI October 2007

According to data from Turkstat the rise in general index was realised in the 2003=100 based Consumer Price Index on the previous month by 1,81%, on December of the previous year by 6,08%, on same month of the previous year by 7,70% and on the twelve months moving averages basis by 8,98% in October 2007.





The highest monthly increase was in the index for clothing and footwear by main expenditure groups.

The highest monthly increase was 8,22% in the index for clothing and footwear by main expenditure groups. The indices rose for food and non-alcoholic beverages 3,41%, for hotels, cafes and restaurants 1,54%, for miscellaneous goods and services 1,02%, for housing 0,65%, for recreation and culture 0,26%, for furnishings and household equipment 0,25%, for health 0,07% while the indices declined for communication -0,02%, for education -0,19%, for transportation -0,41%. The index for alcoholic beverages and tobacco remained unchanged.

The highest annual increase was in the index for food and non-alcoholic beverages.

The highest increase was 14,71% in the index for food and non-alcoholic beverages compared with the same month of the previous year. Alcoholic beverages and tobacco (10,06%), hotels, cafes and restaurants (9,73%), housing (8,30%), for education (6,07%) were the other indices where high increases were realised.

Turkey Producer Prices October 2007

according to data released by Turkstat at the end of last week, the annual rate of increase in Turkish producer prices dropped back slightly in October. The monthly change in PPI from September was -0.13%, and when compared with October 2006 the index rose by 4.41%.



As can be seen in the chart the year on year rate of increase has dropped back strongly since March, and despite the small surge in August and September this months data do seem to indicate that the disinflationary process is once more working.

As we know from the CPI the price of foodstuffs is a continuing problem in Turkey (as elsewhere) and this finds its reflection in the PPI for agriculture which increased 14.83% compared with December 2006, and by 13.50% as compared with October 2006. The industry PPI increased 2.63% compared with December 2006 and by 2.38% as compared with October 2006.

The highest monthly increase in the PPI for industrial activities was the 7.51% registered in the index for crude petroleum and natural gas production.

There were increases 3,82% in the index for mining and stone quarrying, 0,11% in the index for manufacturing industry and a decrease -8,94% in the index for electricity, gas and water by sub-sections of industry.

Turkey Consumer Confidence September 2007

According to data released by Turkstat today Turkish consumer confidence dropped back slightly in September. Given everything that is happening at the moment I suppose that that is hardly surprising. The Consumer Confidence Index, which was 98.25 in August 2007, decreased by 1.16% compared to August 2007 and became 97.11 in September 2007.



At the end of the day, confidence is still at a pretty high level, and I suppose that that is the interesting and important thing.

Turkey Employment July 2007

Working age population in Turkey increased by 880 thousand in the period of between July 2006 and July 2007. The non-institutional civilian population increased by 922 thousand persons and has reached to 73 million 567 thousand persons, while the non-institutional working age civilian population increased by 880 thousand and reached 52 million 581 thousand in July 2007.


Non-agricultural employment increases by 540 thousand

The number of employed persons increased by 490 thousand persons compared to the same period of the previous year and reached to 23 million 747 thousand persons in July 2007. Agricultural employment decreased by 50 thousand persons and non-agricultural employment increased by 540 thousand persons in this period.


Of those who were employed in July 2007, 28.7 % were employed in agriculture, 18.7 % in industry, 6.4 % in construction and 46.2 % in services. Employment in agriculture decreased by 0.8 and industry decreased by 0.3 percentage points while construction employment increased by 0.4 and services employment increased by 0.7 percentage points.


The number of unemployed increased by 45 thousand compared to July 2006 and reached 2 million 296 thousand. The unemployment rate was unchanged at 8.8 %. Unemployment rate was 11.2 % in urban areas and 5.4 % in rural areas.

The labour force participation rate (LFPR) increased to 49.5 % with 0.2 percentage points increase compared to July 2007. The LFPR increased to 72.9 % for males and to 26.7 % for females. LFPR was 46.2 % in urban areas and 55.4 % in rural areas.

As can be seen in the chart below, Turkey is struggling to provide sufficient employment for a very rapidly increasing working age population.



The quantity of employment has increased considerably (in terms of employment creation) over the last 12 months. The decline in both employment and enthusiasm to join the labour force that was produced by last summmers financial crisis is clear to see in the data, as is the subsequent recovery.




A similar picture is evident if we come to look at the unemployment data.

Turkey CPI September 2007

According to data released last week from Turkstat, the general consumer price index rose by 1.03% in September on August. On December 2006 the index rose by 4.19%, on same month of the previous year by 7.12% and on the twelve months moving averages basis by 9.17%.




The highest monthly increase was 2.29% in the index for food and non-alcoholic beverages. The indices rose for education by 2.28%, for clothing and footwear by 1.62%, for hotels, cafes and restaurants by 1.07%, for housing by 0.97%, for miscellaneous goods and services by 0.79%, for transportation by 0.61%, for health by 0.08%, and for alcoholic beverages and tobacco by 0.02%. The indices declined for communication by 0.50%, for recreation and culture by 0.71%, and for furnishings and household equipment by 1.24%.


These results represent a marginal improvement in the annual inflation rate from the 7.39% recorded in August. As Serhan Cevik points out, September is always a tricky month in Turkey, given seasonal fluctuations and other possible economic shifts. This year has been even more challenging because of the Ramadan effect. Based on the lunar calendar, the month of Ramadan starts 10 days earlier each year, resulting in another type of seasonality in countries with a predominantly Muslim population. The effects of Ramadan and festivities are especially significant on food and clothing prices. And this is exactly the difficulty we face this year. As Cevik says:

Food prices are already on the rise and the Ramadan effect — increasing food consumption by around 20% from the average of the rest of the year — could exacerbate inflation pressures. Likewise, clothing prices may show a more pronounced seasonality during and right after the month of Ramadan, intensifying ‘back to school’ price adjustments. Nevertheless, we stick with our long-standing call that disinflation will accelerate towards year-end, and especially in 2008, thanks to supportive economic fundamentals.

Food prices have increased a lot all around the world and have become a significant inflation risk in countries where food represents a greater share of the CPI. In Turkey’s case, food accounts for 28.5% of the consumption basket and thereby could make the headline figure more volatile. For example, over the past two years, food price inflation increased from 4.9% at the end of 2005 to 14.2% at the beginning of this year. After declining to 9.2% in July, food price inflation surged to 12.4% in August. This sustained increase and higher volatility in food prices is mainly a result of the changing behaviour of unprocessed food prices. The year-on-year rate of increase in unprocessed food prices surged from an average of 2.9% in 2005 to 21.8% in July 2006 and then declined to 10.8% in November 2006. However, there was yet another burst to 20.7% at the beginning of this year, followed by deceleration towards 8.9% in July. Once again, that turned out to be temporary and unprocessed food prices recorded a year-on-year increase of 16.2% in August.

Basically the good news is that inflation is on the way down, and should be in the region of 6% by the end of the year and may well fall below 4% by the second quarter of next year. However there are still large scale downside global risks arising from the potential for higher commodity prices and the impact of financial volatility on the value of the lira. Furthermore, domestic demand is set to recover in the second half of the year and especially as we enter in 2008. Given all this, the Central Bank of Turkey will most likely maintain a cautious stance and normalise short-term interest rates at a measured, gradual pace, possibly to 16.5-16.75% this year and 14.5-15% next year.

Turkey Industrial Production August 2007

The Turkish monthly industrial production index increased by 6,1 % in August of 2007 compared to the same month of 2006

Monthly Industrial Production Index with the base year 1997=100, composed from the production information of 2005 important industry items according to ISIC Rev.3, reached 146,8 by increasing 6,1 % in August of 2007.

In the sub sectors level of industry, mining sector index reached from 113,5 to 130,3 by increasing 14,8 %, manufacturing industry sector index changed from 135,0 to 142,0 by increasing 5,2 %, electricity, gas and water index reached from 190,4 to 206,8 by increasing 8,6 % in August of 2007 compared with same month of the previous year.

When the eight-month average of 2007 is also compared to previous year, total industry sector index reached from 135,1 to 142,3 by increasing 5,3 %, mining sector reached from 96,4 to 106,5 by increasing 10,5 %, manufacturing industry sector reached from 134,1 to 140,2 by increasing 4,5 %, electricity, gas and water sector reached from 168,9 to 185,5 by increasing 9,8 %.

Turkey August 2007 Trade Deficit

What follows is a brief research note on the latest monthly trade data from Turkey. (Anyone interested in a more in-depth analysis of recent developments in the Turkish economy can try my post The Anatolian Tiger, for Global Economy Matters, 9 September 2007).

The coupling-uncoupling issue is a complex one. In many ways there are clear signs that some parts of the global economy are more coupled than ever before. To take one case in point, Japan. As Richard Katz noted, Japan can hardly be said to have uncoupled from the United States economy given that, since 2001, there has been a 77 per cent correlation between Japanese GDP growth and the level of exports in the previous quarter. Indeed, during the years between 2000-2007, the correlation between GDP growth in the US and Japan was 74 per cent. On the other hand, and changing continents adroitly, Serhan Cevik informs us that that the equivalent correlation for Turkey was 71 per cent, and this close relationship exists in the data despite the fact that only 5% of Turkey's exports actually end up in the US.

The key to understanding this mysterious Turkey-US "coupling" undoubtedly passes through the Eurozone, and in particular through Germany, which is, in its turn, very dependent on exports for achieving economic growth. So it is with this focus in mind that I am going to take a quick look at the latest trade data from Turkey.

According to provisional data from the Turkish Statistical Office Turkish exports grew in August 2007 by 27.7% (year on year) and reached a value of 8,698 million Dollars. At the same time imports grew by 22.2% reaching 15,006 million Dollars. The foreign trade deficit for August thus increased by 15.4% over August 2006, rising from 5,465 million Dollars to 6,308 million Dollars.




The weight of the EU in Turkish Exports remains important. Over the January-August 2007 period, and when compared with the same period of the previous year, exports to the EU were 37,960 Million Dollars - or up by 25.9%. The proportion of the EU countries in total exports was 56.6%.




In August 2007, the main export partner was Germany with 1,044 million Dollars, an increase of 41.9% over August 2006. So Turkey is evr more dependent in this business cycle on Germany for export growth while Germany is dependent on both the US and Eastern Europe for both export growth and GDP growth. (The principal driver of Turkish growth is not at this point exports but rather domestic demand and investment).




Germany was followed in importance by the UK (699 Million Dollars), Russia (423 Million Dollars), France (417 Million Dollars), Italy (414 Million Dollars) and the USA (343 Million Dollars).


For August 2007, the top country for Turkey’s imports was Russia (2,059 Million Dollars) reflecting Turkey's dependence on imported energy, while imports from other countries range from Germany (1,857 Million Dollars), to China (1,289 Million Dollars), to Italy (879 Million Dollars) and the USA (812 Million Dollars).


For the period January-August 2007, road vehicles and components had the highest value share in exports at 9,940 million Dollars, followed by iron and steel (5,762 million Dollars), machinery, mechanical appliances, boilers, equipment and parts 5,619 million Dollars) and articles of apparel and clothing accessories (5,314 million Dollars).

Over the same period, the top categories for imports were mineral fuels and mineral oils (20.401 million Dollars) followed by machinery, mechanical appliances, boilers, equipments and parts (14,145 million Dollars) and ıron and steel (10,518 million Dollars).

What we can see from all of this is that, at least in foreign trade terms, Turkey is very dependent on the EU, and in particular on Germany and the EU 10. Since Germany is itself very dependent for growth on exports to the US and the EU 10, we can expect any slowdown in that mechanism to find a reflection in the level of economic activity in Turkey.

Turkey Sells $1.25 billion in dollar bonds

According to reuters this morning:

A sale of $1.25 billion in dollar bonds by Turkey suggested some stability was returning to debt markets, although signs of distress from the global credit crunch were still apparent.

U.S. student lender Sallie Mae said a consortium planning a $25 billion leveraged takeover did not expect to complete the deal on the agreed terms.

Sallie Mae's shares closed down 2.7 percent on Wednesday at $45.01 per share, almost $15 below the agreed takeover price as traders bet a lower price would be negotiated for the takeover.

The differing fortunes of Turkey's bond sale and Sallie Mae's takeover underlined the conclusions of the Financial Stability Forum, a global watchdog that met on Wednesday to discuss the credit squeeze that has caused turmoil in global markets.

I am especially interested in the comparative ease with which Turkey has been able to sell these bonds since on 5th September 2007 I argued the following:

This post is about Turkey, and it may be surprising in the light of what I have just said if I now go on to suggest that it is precisely the fact that Turkey may not be so badly ensnared in the trouble which is brewing (I mean no one, but no one, will escape completely scott free) as some other emerging economies (and I am talking here about some key members of the EU10 accession countries, and for reasons explained in this post)which may well be of interest.

The post which follows will be the first of four. Here I will simply look at some currency data, in an attempt to put my finger on the first crack which has appeared in the edifice of emerging market solidity. Later this week I will try to address Turkey's fundamentals as I see them, and explain why I feel there are grounds for some considerable optimism about Turkey's medium term economic future.
read more

So Turkey is indeed holding its ground while others begin to wilt. Interesting:

HUNGRY FOR TURKEY

Turkey boosted emerging market confidence, selling its bond due in 2018 at a yield of 2.216 percentage points over 10-year Treasuries. That was just above a yield of 2.18 points over Treasuries on 2020 bonds it sold in February.

Enrique Alvarez, an analyst at IDEAglobal, said the sale showed investor hunger for emerging market assets.

"Turkey was also helped by the fact that few countries have issued such bonds since the global credit crunch in July," he said.

To be continued.

Turkey Wages Q2 2007

According to the results of the wages index per-hour-worked and earnings index per-employee in manufacturing industry published by Turkstat; wages per-hour-worked in production increased by 8.9 %, earnings per-production-worker increased by 9.2% and earnings per non-production worker increased by 10.5% for the second quarter of 2007 over those of Q2 2006.

In public sector, wages per hour worked in production increased by 7.1 %, earnings per production worker increased by 9.9 % and earnings per non-production worker increased by 6.1 %. In the private sector, wages per hour worked in production increased by 9.5 %, earnings per production worker increased by 9.7 % and earnings per non-production worker increased by 10.8 %.

Here's the chart for the wages index:



and here are the annual rates for wages and earnings of production and non-production workers:

Electricity Prices in Turkey

Electricity prices in Turkey are now below the cost of production, and Morgan Stanley's Serhan Cevik is not a happy man:

After lowering electricity prices by 6.4% in 2003, the Turkish government has kept the tariff structure unchanged in the last four years, providing an outright subsidy to the rest of the economy as the price of oil soared from an average of US$25.3 in 2002 to US$68.6 this year. It may have scored well with the voters, but the cost of keeping electricity prices artificially low has become an enormous burden on public finances and even on the current account. Although there are no official data on the cost of electricity production, we can estimate the changes from the breakdown of generation methods. Fossil fuels account for 75% of total electricity production in Turkey, which makes it susceptible to the price of oil. In the past four years, the average price Turkey paid for imported crude oil increased by 180% in lira terms and the price of natural gas increased by 65% in the domestic market. On the other hand, industrial and household electricity prices remained unchanged over this period. As a result, electricity prices in Turkey are now almost half of the European average. In our view, Turkey can no longer maintain such an irrational pricing scheme without creating even more distortions throughout the economy.
Read more

Turkey Consumer Confidence Index August 2006

According to Turkstat, in the monthly Consumer Tendency Survey, the Consumer Confidence Index, which was 95.49 in July 2007, increased by 2.88% compared to July 2007 and became 98.25 in August 2007. Here is the chart:

CBRT Lowers Interest Rates

The CBRT decided last week to lower Turkish interest rates, reducing the overnight borrowing rate from 17.50 to 17.25 percent,. According to the press release:

Readings on economic activity and inflation are in line with the outlook presented in the July Inflation Report. While private consumption and investment demand exhibits signs of recovery, external demand moderates. Aggregate demand conditions continue to support the disinflation process. The Committee assesses that developments in services inflation have been more favorable than expected. Notwithstanding the risks related to energy and food prices, inflation is expected to further decelerate owing to the lagged effects of strong monetary tightening.

The Committee closely monitors the developments in international liquidity conditions and credit markets. In the meeting, the Committee evaluated the recent data, and assessed that global developments are likely to restrain both the domestic and external demand growth, increasing the downward risks on achieving the 4 percent target in the medium term.

In this respect, the Committee decided that current conditions require launchingthe measured rate cuts mentioned in the Inflation Report. The Committee underlines that the current monetary policy stance continues to be restrictive. The exact timing and extent of further easing may vary depending on the incoming information regarding global liquidity conditions, external demand, public expenditures and other determinants of medium term inflation outlook.

Serhan Cevik comments:

With an unexpected decision, the Central Bank of Turkey lowered interest rates by 25bp to 17.25% last week. What is surprising about the start of the monetary easing campaign is its timing. After all, the central bank over-tightened the policy stance by 425bp to 17.5% last summer in an attempt to rebuild credibility and rein in the inflationary impact of the lira’s sudden depreciation. As expected, maintaining such an ultra-tight monetary policy stance for more than a year has moderated growth in domestic demand, helped in strengthening the exchange rate and gradually improved inflation dynamics. This is why we have long argued for the coming normalisation of interest rates, expecting a gradual easing cycle towards 16.5-16.75% by the end of this year and around 14.5-15% in 2008. However, with the recent volatility in global financial markets and the rise in energy and food prices, we revised our expectation for the start of monetary easing from a 25bp reduction in September to a 50bp cut in October (or even possibly November). We thought that a higher degree of global uncertainty warranted a more cautious approach, even though slower growth in the world economy may well have disinflationary effects over the medium term (see The Case of Gradualism, August 6, 2007). Obviously, the central bank thought otherwise and moved ahead with the first rate cut. Could this lead to a dislocation, especially since we were calling for a rate cut next month? The problem is not whether domestic factors justify the easing, but the emergence of new risks along with higher energy and food prices.

Actually, if we look at what is happening to the Lira this morning, following the Federal Reserve decision yesterday, then we can think of another interpretation for this decision, and that is to reduce the speculative inflow of funds during the uncertainty and volatility which is surely going to follow the lowering of the federal funds rate:

Turkey's lira gained by the most in almost two months against the dollar as the Federal Reserve decision to cut interest rates spurred investors' appetite for riskier, emerging-market assets.

The lira, the best performer in the past month, rose with other emerging-market currencies such as Iceland's krona and Hungary's forint after the Fed cut its benchmark rate to 4.75 percent, pushing global equity markets higher. Turkey's ISE National 100 Index advanced 3.5 percent.

Obviously the argument about a lowering in US interest rates increasing the appetite for riskier assets doesn't make any sense at all, since it seems to imply that a US recession may be on the way, and this would normal produce a safe haven mentality. The point is, where will the safe havens be this time round? One of my arguments here on this blog is that in fact Turkey - despite its exposure to a slowdown in Europe - may well be able to weather the storm better than others, although I am not at all convinced that financial market participants can see this at this point. Evidence for that might be the fact they are buying the Hungarian forint too, and that is a very different story indeed.

Turkey Labour Force Survey June 2007

The latest version of the Labour Force Survey is now out.

While non-institutional civilian population increased by 925 thousand persons and has reached to 73 million 492 thousand persons, non-institutional working age civilian population has increased by 837 thousand and has reached to 52 million 484 thousand persons in the period of June 2007.

Number of employed persons increased by 381 thousand persons compared to the same period of the previous year and has reached to 23 million 581 thousand persons in the period of June 2007. Agricultural employment decreased by 72 thousand persons and non-agricultural employment increased by 453 thousand persons in this period.

Number of unemployed persons increased by 40 thousand persons compared to the same period of the previous year and has reached to 2 million 285 thousand persons in Turkey. Unemployment rate was realized without any change as 8,8%. Unemployment rate declined to 11,1% with a 0,1 percentage points decrease in urban areas and realized without any change as 5,5 % in rural areas.


Non-agricultural unemployment rate is realized without any change as 11,5 % compared to the same period of the previous year in Turkey. The rate is also realized without any change as 10,3 % for male and 16,6 % with a 0,1 percentage points increase for female.

The ratio of persons who worked without any social security related to the main job declined to 48,6 % with 1,7 percentage points decrease. The share of persons who did not have any social security in agriculture decreased from 88,2 % to 88,1 % and that in non-agriculture decreased from 34,6 % to 32,8 % compared to the same period of the previous year.

Labour force participation rate (LFPR) realized without any change as 49,3 % compared to the same period of the previous year for Turkey in June 2007 period. LFPR was increased to 72,4 % with a 0,1 percentage points increase for male and realized without any change as 26,6 % for female. LFPR was 46 % with a 0,3 percentage point increase in urban areas and 55,1 % with a 0,3 percentage points decrease in rural areas in this period. As for the distribution of labour force by education and age group;

Here's a useful chart from Turkstat:


Sectoral distribution of employment, (In Thousand)

The Current Outlook

Historically Turkey’s large financing requirements have made it particularly vulnerable to any sudden change in sentiment via a grinding to a halt in capital inflows, and what were perceived as weaker fundamentals than those which pertained in other emerging market economies (a large and widening current account deficit; a still high gross public debt ratio tilted towards instruments with adjustable rates or short maturities; and an uncertain inflation outlook) have often exposed Turkey to a sudden reversal of capital inflows.

The core argument of my recent extensive review of Turkey's current situation is that this situation need not be like this in the future. History is not condemned simply to repeat and repeat itself. There is evolution, and there is development. Again, if we look at the most recent one month chart for the euro-lira cross, we will observe that this time round Turkey continues to resist the pressure tolerably well:




(Since this chart is a measure of the number of lira per euro, the downward movement indicates a rise in the value of the lira vis a vis the euro).

True, with bank base rates at 17.25%, there may be good reason to expect the lira to appear robust you may say. The point is that Turkey is experiencing extremely tight monetary conditions and managing to maintain a relatively healthy annual GDP growth rate (an annualised rate of 5.3% over the first six months of this year), while Hungary, for example, which has a central bank base rate of 8%, is plummeting rapidly downwards into recession. It is the reason why the Turkish economy is exhibiting this resilience at this point which is what should be interesting us.

One of the explanations for this positive upside surprise would undoubtedly be Turkey's strong underlying productivity position. The history of the tiger phenomenon has clearly shown us that that factor accumulation alone, without accompanying efficiency gains, does not bring sustainable economic growth and rapid increases in per capita living standards. In Turkey’s case, however, productivity improvements have been one of the most under-appreciated aspects of the post-2001-crisis performance, and have been one of the principal drivers of the longest stretch of uninterrupted output growth in Turkey's history. In the pre June 2006 crisis period productivity growth had been steadily accelerating - reaching an annual rate of 8.5% towards the end of 2005, for example.

Output per worker surged at a year-on-year rate of 8.5% in the fourth quarter of 2005, up from 6.1% in the third quarter and 3.8% in the first half. Even in terms of output per-hour worked, the rate of productivity growth accelerated from an average of 4.7% in the first half of 2005 to 7.2% in the second half (and 8.4% in the last three months) of the year. This sustained productivity acceleration, as well as providing greater impetus to output growth, was also a big factor behind the massive disinflation which lead Turkey towards single-digit inflation territory. The rise in output per hour-worked in the manufacturing sector was somewhere in the region of 38% in the 2001-2006 period, easily outpacing the 32.5% rise in real GDP.

Also the 187.7% real increase in business investment spending on machinery and equipment over the same period - a reading which compares impressively with a "mere" 24.2% increase in construction expenditures — raised the capital/labour ratio and laid the basis for higher trend productivity growth in the longer run. The consequence of all this was that Turkey’s total factor productivity growth accelerated from an average of 0.5% a year in the 1990s to 4.8% in the post-crisis period, and this productivity boom will continue improving the quality and sustainability of non-inflationary output growth.

Fortunately, both the Turkish nation and the world at large have singularly and notably paid little heed to the strange warning which appeared on the Turkish military website to the effect that the nation was in peril. The nation is in fact in full health, and, guess what, a headscarf is simply that, something you wear on your head. As we have seen the only thing which may really be in peril is a privileged "insider" position in the old institutional structure, built up, strangely enough, via access to pension systems, their benefits, and the control which the consequent funds exercised over the old, tremendously inefficient, state sector.

Even so, some might have assumed given the past record, that a stand up fight between an elected Turkish government and the Turkish military might have negatively affected investor confidence, especially given the way in which the 2001 economic crisis was kicked-off by an apparently minor row between the then President - Ahmet Necdet Sezer - and the coalition government, all aided and abetted, of course, by a thoroughly rotten banking system. Yet in May of this year, when the AKP government undertook the initial public offering of 25% of the publicly owned Halkbank, it fetched $1.85bn, was seven times over-subscribed and finished trading the next day at an 11% premium. Something, it seems has changed. To plagiarize one former US president, it's the demography, silly!

Looked at another way, we could ask ourselves whether the reason why Citigroup paid a substantial sum of money (some would say an exceptionally generous sum) for a minority share in another Turkish bank (Citigroup paid $3.1 billion for a 20 percent stake in Akbank and indeed have only this month acquired the Turkish brokerage house Opus Menhul Degerler) earlier this year has anything to do with the fact that Turkey is actually the last pristine European market? At a time when investors across the globe are concerned about problems thought to be associated with the US subprime mortgage market, it should not escape our notice that house loans in Turkey are still a relatively new phenomenon - and constitute only 4% of GDP (compared to a European average of around 40%). Citicorp is not the only recent bank sector participant to enter the Turkish market, since the ING Groep, who are based in Amsterdam, agreed in June to pay $2.67 billion for Oyak Bank.

And there are more than banks to sell. Even while Prime Minister Recep Erdogan, who ironically chose a shining light bulb as a symbol for the AKP, struggles to keep electrical power generation on as the largely state-owned Turkish electricity industry continues to have trouble coping with high summer demand amid record heat it is worth reminding ourselves that Turkey needs all that extra power because its factories are humming, and because the ever wealthier Turks are demanding more and better services after 21 straight quarters of economic growth.

We should also remind ourselves that his recent electoral victory gives Erdogan the freedom to step up the sale of state companies and push for new foreign investment, so he can safely now proceed with plans to privatize the power companies. So the short term crisis has a solution, and in this case the reach of the new government may well not exceed its grasp. ie the problem, like so many others in the new Turkey, has a solution, and thus is likely to be solved.

Erdogan has made it very clear that one of the things he wants to do, in the light of the election results (nice pun that) is to put Turkey's power stations, regional electricity grids and the national lottery all up for auction. This follows decisions earlier this year, to sell the right to operate a group of airports in Istanbul and the resort city Antalya for $5.8 billion. Also in July, after years of delay, Petkim Petrokimya Holding, a state-owned chemicals maker, was sold for $2.05 billion to a group of Russian and Kazakh investors.

As a result, foreign direct investment rose to a record $19.8 billion in 2006 and has already totaled $11 billion for the first five months of 2007.

In the chronic inflation which characterized the domestic environment up until 2001, Turks simply did not borrow, or perhaps - better put - few would willingly lend to them. Consumer loans are currently 20 times higher then they were four years ago, although they still only constitute some 6-7% of GDP, while European averages are in the 35-40% region. As someone once said, there's gold in them there hills (the Anatolian ones, of course) and plenty of it, so let's go and dig. And as for me, ah, well now it really is time to go and smell the coffee.

Turkey Industrial Output July 2007

Details of the monthly production index are now out from Turkstat. The index increased by 3,5 % in July of 2007 when compared with July 2006. Despite weak domestic demand out put has now recovered from the drop earlier in the year (although month on month we are still down slightly from June) and the level is now above that for the same period in 2006. Given the very tight monetary conditions prevailing this cannot be considered a bad result. Here is the chart for output since the start of 2006.

Turkey Q2 2007 GDP

Data for Q2 2007 Turkish GDP were released today by Turkstat.

The second quarter growth rate of gross national product in 2007 compared to the same quarter of previous year has increased 3.9% in constant prices. The second quarter growth rate of gross national product in 2007 has increased by 10.5% to 148 110 million New Turkish Liras in current prices when gross national product has increased by 19.4% to 110 264 million USA dollar.The second quarter growth rate of gross national product in 2007 has increased by 3.9% to 38.9 million New Turkish Liras in constant prices.

Perhaps the most interesting details are the following ones: Q2 growth in private final consumption was negative - -0.3% - government final consumption expenditure grew at 7.4%, gross fixed capital formation at 10.0%, exports of goods and services 12.7 %, and imports of goods and services 8.4%, all of these as measured in constant prices. Here's an updated quarterly GDP chart:



And here are the tables giving the detailed breakdown, as supplied by Turkstat.

I.a. Gross national product results by production approach

		GNP Current prices	Growth rate	GNP Current prices	Growth rate	GNP Constant prices	Growth rate
	Quarter	New Turkish Liras	%	(Million USA$)	%	New Turkish Liras	%
	I	107 510 993 818	13.8	80 651	13.1	31 625 722	6.4
	II	134 019 473 702	22.4	92 356	15.1	37 455 914	9.3
	III	177 706 868 605	18.9	119 238	7.1	47 191 041	4.3
	IV	156 546 626 011	17.8	107 428	9.6	38 070 043	4.6
2006	Annual	575 783 962 136	18.4	399 673	10.8	154 342 719	6.0
	I*	129 321 243 406	20.3	91 574	13.5	33 787 316	6.8
	II	148 110 192 435	10.5	110 264	19.4	38 908 124	3.9
2007	6 months	277 431 435 841	14.9	201 837	16.7	72 695 440	5.2

I.b. Gross domestic product results by production approach

		GDP Current prices	Growth rate	GDP Current prices	Growth rate	GDP Constant prices	Growth rate
	Quarter	New Turkish Liras	%	(Million USA$)	%	New Turkish Liras	%
	I	107 768 604 282	13.8	80 844	13.2	31 978 940	6.7
	II	133 790 851 171	21.4	92 183	14.1	37 614 899	8.3
	III	177 905 779 725	19.0	119 376	7.2	47 624 611	4.8
	IV	156 856 995 687	18.1	107 642	9.9	38 514 044	5.2
2006	Annual	576 322 230 865	18.3	400 046	10.7	155 732 493	6.1
	I*	129 586 986 949	20.2	91 762	13.5	34 184 933	6.9
	II	148 001 181 872	10.6	110 189	19.5	39 094 893	3.9
2007	6 months	277 588 168 821	14.9	201 951	16.7	73 279 826	5.3

II. Growth rate of sectors in 2006 by production approach (%)

Current Prices Constant Prices

Sectors	I. Quarter*	II. Quarter	6 months	I. Quarter*	II. Quarter	6 months
Agriculture	14.8	7.5	10.5	4.4	-1.1	0.9
Industry	21.9	8.9	14.5	7.5	3.2	5.2
Construction	41.5	29.3	34.5	16.5	15.7	16.1
Trade	20.9	6.4	12.6	6.6	3.0	4.6
Transportation and Communication	16.9	10.2	13.2	5.5	4.7	5.1
Financial Institutions	18.2	20.6	19.5	8.3	6.2	7.3
Ownership of Dwelling	22.4	22.8	22.6	2.4	2.4	2.4
Business and Personal Services	19.1	11.4	14.9	4.7	3.8	4.2
Government Services	18.4	11.6	14.9	1.3	1.3	1.3
Private Non-Profit Institutions	18.9	-	12.3	1.2	-1.1	-0.1
Import Duties	13.0	-	4.2	9.8	8.6	9.2
Gross Domestic Product	20.2	10.6	14.9	6.9	3.9	5.3
Gross National Product	20.3	10.5	14.9	6.8	3.9	5.2

III. Growth rate of expenditure groups in 2006 (%)

Current Prices Constant Prices

Expenditure Groups	I. Quarter*	II. Quarter	6 months	I. Quarter*	II. Quarter	6 months
Private Final Consumption Expenditure	12.6	6.8	9.4	2.0	-0.3	0.8
Government Final Consumption Expenditure	21.0	13.9	17.2	9.0	7.4	8.1
Gross Fixed Capital Formation	24.6	20.1	22.0	3.0	10.0	6.9
Exports of Goods and Services	31.4	13.5	21.1	14.7	12.7	13.6
Imports of Goods and Services	25.3	7.7	15.2	4.3	8.4	6.5