Turkeys Trade Deficit Widens In July

According to the provisional data from Turkstat, exports were up by 40.8% year on year in July (and reached to 12,583 Million Dollars), while were up by 35% (and reached to 20,537 Million Dollars).

Over the January-July period exports grew 39% in 2008 compared with 2007, to 81,397 Million Dollars while imports grew 36.6% in 2008 compared with 2007, to 126,380 Million Dollars.

At the same month, foreign trade deficit raised by 26.7%, reached from 6,276 Million Dollars to 7,954 Million Dollars. While during the January-July period the foreign trade deficit was up by 32.4% over the same period in 2007 and reached 44,983 Million Dollars.




Evidently the evolution in the trade deficit, which may be mostly about energy, is a growing cause for concern.

Germany and Russia are the main partners...

The weight of the EU in Exports has continued in July 2008. As compared with the same month of the previous year, exports to EU were 6,092 Million Dollars and increased by 23.3%. The proportion of the EU countries was 48.4%.

In July 2008, the main partner for exports was Germany with 1,227 Million Dollars and increased by 24.7%. For exports, Germany was followed by UAE (968 Million Dollars), Italy (839 Million Dollars) and The UK (776 Million Dollars). For July 2008, the top country for Turkey’s imports was Russia (3,146 Million Dollars), records for imports range from Germany (1,789 Million Dollars), USA (1,474 Million Dollars) and China (1,426 Million Dollars).

And again, as we have been seeing, the current dependence on Russia is becoming rather problematic, and possibly just as worrying as that trade deficit.

Turkey spent a good part of last week protesting to Russia over trade restrictions after trucks were held up at customs posts, hurting exports to Turkey's biggest trading partner. Russian customs inspections, which previously took a few hours, are delaying the entry of Turkish trucks for as long as 20 days, according to an official at Turkey's Trade Ministry. The ministry estimates Turkey could lose as much as $3 billion in exports if the curbs continue, and has sought an explanation from the Russian government.

Russia last year was the largest market outside the European Union for Turkish goods, with $4.9 billion of exports, according to the Turkish Assembly of Exporters. Turkey sells textiles and food to Russia, and relies on imports of Russian natural gas for heating and electricity. The restrictions are especially damaging for Turkish textile exporters who are currently selling their winter collections, Trade Minister Kursad Tuzmen said yesterday. Textile and clothing exports were Turkey's biggest foreign currency earner last year, bringing in $22.6 billion to help cap a trade deficit that's widening as energy costs rise.

Turkish Builder Enka Hit Hard

Enka Insaat & Sanayi AS, Turkey's biggest builder, and brewer Anadolu Efes Biracilik & Malt Sanayii fell the most in more than a year in Istanbul trading last week on concern that they may lose business in Russia as a result of tensions in the Caucasus.


Investors are concerned that Enka, which has won contracts to build airports and power stations in Russia and modernize Russia's parliament buildings, may lose out as the military conflict in Georgia hurts Russia's relations with the North Atlantic Treaty Organization or NATO, in which Turkey is a member. Anadolu Efes beer sales in Russia have surged as the company acquired local brewers.

Almost half of Enka's backlog of orders are in Russia, and more than half its assets are in Russia and other CIS countries, Hackett said. Enka owns the Ramstore chain of supermarkets in Russia.

Turkey Country Outlook August 2008

by Edward Hugh: Barcelona


Executive Summary

Turkey’s economy grew at a 4.5 percent in 2007. The economy accelerated to an annual rate of 6.6% in the first quarter of 2008. Thus despite being faced with a series of major headwinds – the June 2006 lira crisis, the August 2007 sub-prime turmoil, the threat of having the governing party banned and a global food and energy price shock – the growth momentum of the Turkish economy has been maintained.

Headline inflation had been on a downward path, but started to pick up in the second half 2007 on the back of escalating food and energy prices, and reached an annual rate of 12.1 percent in July. Core inflation has been lower, but has followed a similar trajectory; reaching 6.8 percent in July and thus headline inflation has continued to remain above the central bank 2007 target of 7.5%. The central bank has, rather belatedly, begun a process of monetary tightening, with three 50 bp rises at three consecutive meetings before pausing in August. We do not anticipate any additional tightening in the immediate future as we feel the bank will watch and wait to observe the future course of oil and food prices.

Turkey’s current account deficit stabilized temporarily in 2007. Despite an appreciating lira, export and tourism performed tolerably well throughout the year, supported largely by earlier productivity gains. Import growth was weak in early 2007 (reflecting sluggish domestic demand and the lagged effects of the mid-2006 depreciation) but gradually regained strength as the lira once more rose and oil prices surged. The current account deficit was 5.7 percent of GDP for the full 2007 - down from 6.0 percent in 2006 - but the gap has been widening again in recent months.


Fiscal resolve in Turkey’s AKP governing party predictably weakened considerably in 2007 – an election year. Stripping out one-off factors, which buoyed fiscal performance in 2006, fiscal policy was scheduled to tighten considerably in 2007 .In the event, the envisaged discretionary tightening did not materialize: the 2007 nonfinancial public sector primary surplus was 1.5 percent of GDP less than forecast. The Turkish authorities are now targeting a primary surplus of 3.5 percent of GDP to create additional fiscal space for infrastructure investment (including major projects in poorer southeast areas), labor market reform, and higher transfers to subnational governments. The authorities view this stance as appropriately balancing macroeconomic concerns against microeconomic needs, and we by and large concur. It is also politically both wise and expedient in the view of the tensions which exist inside the country and the serious need for political stability if the desired macroeconomic reforms are to be implemented.



Country Outlook

In the midst of all the recent political debate and tension surrounding Turkey – and in particular the recent legal initiative to ban the governing party, the AKP - one feature stands out above all the rest: the extent and duration of the economic revival which Turkey has experienced since it left the deep recession experienced in 2001. It is clear that something has changed in Turkey, and in a quite remarkable way. The application of well-founded economic policies, anchored in an ongoing EU accession process and backed-up by a steady flow of International Monetary Fund reviews and arrangements, has served to provide Turkey with a greater degree of political and economic stability than was normal in the past and this, when added to the extremely favorable external conditions which characterised the global environment until August 2007, have produced in the Turkish case an impressive average annual GDP growth rate of 6.8% in the years between 2002 and 2007.

Perhaps more than the performance during the good times, what is most remarkable about the recent Turkish performance is the stability it has shown in the face of adversity. Prior to 2001 the Turkish economy had been characterized by a series of boom-bust cycles which were normally accompanied by extended periods of financial fragility. However, political consolidation post 2002 and a much more favorable demographic environment have led to both growing economic rationalization and to a considerable reduction of business-cycle volatility. The volatility of real GDP growth (or any other macro variable, for that matter) has declined to historically low levels post 2001, while total factor productivity growth has surged to around 5% a year.

Since the heady days of 2004 the Turkish economy has had three significant headwinds to contend with: the run on the Lira of June 2006, the sub-prime troubles of August 2007, and the decision by the Constitutional Court to hear the case in favour of banning the governing AKP. In each case risk aversion towards Turkey has increased. – although in each case as can be seen in the chart below with reducing intensity – and in each case the Turkish economy (whilst slowing) has stubbornly refused to be deterred from its course. The general picture can best be seen from the USD-TRY chart, which has three identifiable peaks: the June 2006 run on the Lira, the outbreak of the sub-prime turmoil and April 1, the day the Turkish Constitutional Court decided it was going to hear the case against the AKP.




Of the three the worst was undoubtedly the capital outflow hemorrhage which hit Turkey’s financial markets in June 2006 and brought about a very sharp depreciation in the value of the lira - at one point the drop was 19.0% against the dollar and 21.3% against the euro - all in the space of just four weeks. The impact of the outflow was such that the 5-year bond yield increased by 460bp from 13.4% to 18.0% over the same period, an up-jerk which naturally lead to a sudden contraction in the availability of domestic credit. Faced with the severity of the shock which hit the Turkish economy the central bank had little alternative but to move aggressively, with the central bank policy rate being raised from 13.2% to 17.25% in the space of just 20 days.

Now in each of these shocks has also been followed by some sort of slowdown in the Turkish real economy. The growth rate slowed in 2006 from a year on year 9.7% in Q2 to 6.3 in Q3 and in 2007 from an average annual rate of 5.7 percent in the first half to 3.4 percent in the second. The 2007 slowdown was the result of a variety of other factors, notably a sharp drought-related drop in agricultural production (which subtracted 0.75 percentage points from 2007 growth) and a deterioration in net exports, reflecting the generally stronger lira over 2006 (it was up 19 percent in real effective terms in 2007).




GDP growth started to accelerate again in the first quarter of 2008, but the stronger performance is not expected to be repeated in the second quarter, since alongside the political crisis and drop in confidence that this produced, Turkey has also seen, along with most other emerging economies, accelerating inflation and monetary tightening from the central bank. In general terms the strength of the expansion post June 2006 has been much weaker, and this can be largely attributed to a rapid drop in the expansion of construction activity.



Some slight recovery in construction activity can in fact be noted in the first quarter of 2008, and this to some extent coincides with a rebound in the expansion of domestic private credit which after falling back from an annual pace of expansion of around 80% in June 2006 bottomed out at around 30% June 2007, and by March 2008 was back up at a year on year growth rate of around 45%.



Recent quarters have also witnessed a steady build up in invesment in machinery and equipment, which is basically a very healthy sign since it can be read as showing confidence in future end user demand growth.



Inflation and the central bank response

At the same time supply-side energy and food shocks have also slowed Turkey’s growth at the same time as stoking up inflationary pressures. To reverse the recent surge in inflation, the central bank has halted its earlier easing cycle and moved over to a clear tightening bias.

Energy items, which represent 11½ percent of the HICP basket in Turkey - were supportive of disinflation during the first half of 2007, as lira strength and an administrative freeze on utility prices temporarily shielded consumers from rising world market prices. Since last October, however, the surge in oil prices has clearly made its presence felt on domestic inflation. In addition, food prices – which constitute 28.5 percent of the basket - have continued to exert upward pressure. As a consequence the central bank reported in their last inflation report that 6.8 percentage points of the 10.61 percent annual CPI inflation in June resulted from the direct impact of food and energy items. Of course, another way of looking at this is that 3.81 percentage points came from other factors, and this is just what the IMF staff economists pick up on in their latest report.



The central bank argues that elevated food inflation continues to be the main factor impeding the disinflation process. They suggest that even though domestic weather conditions became more favorable in the first half of 2008, the lagged effects of last year’s poor harvest and high global agricultural commodity prices have continued to keep processed food inflation at high levels. As a consequence, processed food inflation saw a cumulative increase of 14.2 percent in the first half of 2008. In July the annual rate of CPI increase excluding food, energy, tobacco and gold stood at 6.54 percent, suggesting to the central bank that “the breach of the inflation targets can be mostly attributed to factors beyond the control of the monetary policy”. The IMF economists do not agree, and have themselves computed a “virtual” inflation series by applying Turkey’s basket weights to average EU-27 inflation rates for detailed HICP components and then comparing the results. This virtual rate is an attempt to capture the impact of pan-European price trends, which in the case of Turkey are magnified by the relatively high weight of key items (especially food) in the national basket. What the IMF economists found was that while EU-wide trends explain most of Turkey’s very recent inflation dynamics, the general high level of inflation clearly remains a domestic Turkish phenomenon.

The key risk for the Turkish inflation outlook is that the recent supply-side shocks will produce lasting second-round effects. Inflation expectations had been on a steady downward path but have risen sharply again in recent weeks. Moreover, the latest monthly numbers on core inflation - 6.54% in July - do point to a problematic broadening of price pressures, also related to the lira depreciation early this year.

Turkey's central bank left its benchmark interest rate unchanged at 16.75% last week, pausing for the time being a rate hike exercise that has seen three months of consecutive 0.5 percentage point increases. The central bank now hopes that Turkey's key rate, which is now the highest among developed and emerging economies, together with the recent drop in oil prices, and the renewed rise of the lira (which is now up around 12% since it hit a 2008 low of 1.3470 against the dollar on April 1) will all help to slow the pace of consumer-price growth.




Current Account Issues

Turkey’s current account deficit stabilized temporarily in 2007. Despite an appreciating lira, export and tourism performed tolerably well throughout the year, supported largely by earlier productivity gains. Import growth was weak in early 2007 (reflecting sluggish domestic demand and the lagged effects of the mid-2006 depreciation) but gradually regained strength as the lira once more rose and oil prices surged. The current account deficit was 5.7 percent of GDP for the full 2007 - down from 6.0 percent in 2006 - but the gap has been widening again in recent months.

In general Turkey’s external position has improved considerably, and the external debt-to-GDP ratio still fell to 34 percent of GDP by end-2007 (down from 44% in 2003, with the improvement due largely to the lira’s sharp appreciation and strong nondebt-creating inflows). Foreign exchange reserves stood at $76.5 billion at the end of 2007, up from $35.2 billion at the end of 2003.

External financing was ample during 2007, but turmoil in global markets has since been exerting an influence on financing conditions. FDI inflows were buoyant in 2007, driven by mergers and acquisitions in the financial sector, and covered half of last year’s current account deficit. Equity market inflows and long-term corporate loans also were robust. This abundance of external financing allowed the central bank to increase international reserves considerably, but more recently external financing conditions have tightened in many areas - foreign investors have scaled back their portfolio holdings, securitized bank lending has all but ground to a halt, and spreads on syndicated loans have widened.


The Fiscal Dimension

Fiscal resolve in Turkey’s AKP governing party predictably weakened considerably in 2007 – an election year. Stripping out one-off factors, which buoyed fiscal performance in 2006, fiscal policy was scheduled to tighten considerably in 2007 .In the event, the envisaged discretionary tightening did not materialize: the 2007 nonfinancial public sector primary surplus was 1.5 percent of GDP less than forecast. In particular, with growth moderating, it proved difficult to enforce the envisaged spending restraint in an election year. On the revenue side, the main problem has been (and is) weakness in collections linked to consumption, reflecting slow spending for durable goods, as well to a drop in compliance and tax arrears (of around 0.25 percent of GDP) from an ailing state energy enterprise which was unable to raise tarrifs. Nonetheless debt continued to decline rapidly in 2007, helped by lira appreciation and privatization receipts. The overall fiscal balance was a deficit of 1.4% and total debt to GDP was down to 38.8% of GDP (down from 67.4% in 2003). The Turkish authorities are targeting a broadly neutral fiscal stance for 2008 and there seems to be a general consensus that the primary surplus target of the last five years (5 percent of GDP) which formed the cornerstone of earlier macroeconomic success is not necessarily appropriate in the present environment. With gross public debt down to 39 percent of GDP a primary surplus of the previous order is no longer necessary from a debt dynamics perspective, and the Turkish authorities, rightly in our view, see such a target as undesirable, given pressing needs for infrastructure investment and labor tax cuts, and given the need to take some sort of remedial counter measures in the face of a slowing global economy and tight monetary policy at the central bank.




Financial Markets


Turkish financial markets outperformed most of their peers in 2007, but then fell back significantly as the cloud of uncertainty hung threateningly over the AKP, only to rebound strongly again following the final Constitutional Court ruling. Equities rose 42 percent in local currency terms in 2007, while the benchmark bond yield fell by 460 basis points. Moreover, high interest rates and an appreciating currency made Turkey perhaps the most profitable “carry trade” destination throughout the year. The flip side has been strong exposure to global investor sentiment, as witnessed during the market turmoil in August 2007 and more recently in 2008, when Turkey was again among the hardest-hit emerging markets. Indeed, equities fell 22 percent during the January – July period, with bond yields and external spreads up 210 and 55 basis points, respectively, while the lira was down around12.5 percent against a euro-dollar basket. Since the start of July however, the stock markets have rebounded by some 18%, while the lira is up 12% against the dollar since the April 1 low.


Outlook on Key indicators

We expect GDP growth to have remained strong in the second quarter of 2008, but we now expect growth to slow further in the second half of the year. Industrial output (up 0.8% y-o-y in June) has slowed considerably and consumer confidence has been moving steadily downwards since March (suggesting much slower consumption growth in the second half of the year) although it did rebound slightly in July in anticipation of the Constitutional Court ruling. Export growth has remained reasonably strong, but this dynamic may change as Turkey sends nearly 50% of its exports to the EU, and the EU economies have now started to slow considerably.

The Turkish authorities have revised their 2008 growth forecast down from 5.5 percent to 4.5 percent, while the IMF are anticipating 3.95% growth for the year as a whole, a figure which seems to be a little nearer to the likely outcome. Economic activity in the second half is expected to benefit from recoveries in agricultural production, but be weighed down by slowing net export volume growth. At the same time, the outlook for private domestic demand seems to be looking up slightly following the rise in consumer confidence and the equity markets which have followed the Constitutional Court ruling, so we now anticipate 2008 GDP growth in the 4 – 4.5% range, with a slight acceleration in 2009 into the 5 – 5.5% range.

We see the current account deficit widening again in 2008 possibly to 6.5% of GDP. The lagged effects of 2007’s strong lira and surging oil prices are casting a shadow over net exports, and we expect this to continue as the external export environment worsens, while domestic demand continues to move forward. Uncertain prospects for growth in major trading partners pose a downside risk for exports, which is balanced to some extent by the drop in oil prices and a weakening of their impact on import values. We do not, however, anticipate any serious problems for Turkey in financing the deficit, and given that we do not anticipate any early loosening in the monetary stance of the central bank, we expect the upward drift in the value of the lira to continue.

The central bank is likely to continue to maintain the tightening bias in its interest rate policy, although further increases are unlikely in 2008 if agricultural output continues to improve and oil prices continue to fall. We do not accept the central bank view that the recent rise in inflation largely reflects adverse developments in food, energy, and administered prices. The weakening currency in a more uncertain global environment has also played a role, but internal “made-in-Turkey” components also exist – as evidenced by the sharp 18.41% increase in producer prices. So the Turkish central bank will need to keep a firm hand on the rate tiller in the immediate future, and try if it can to rival its Brazilian counterpart in competing for the reputation of being the “new bundesbank”.


The Turkish authorities are now looking for a primary surplus of 3.5 percent of GDP to create additional fiscal space for infrastructure investment (including major projects in poorer southeast areas), labor market reform, and higher transfers to sub national governments. The authorities view this stance as appropriately balancing macroeconomic concerns against microeconomic needs, and we by and large concur. We also see this approach politically both wise and expedient in the view of the tensions which exist inside the country and the serious need for political stability if the desired macroeconomic reforms are to be implemented.

Despite the significant strides forward, a number of key economic challenges are yet to be addressed. In the near term the heightened global risks remain and have even intensified. Domestic political tensions have subsided somewhat but are far from resolved, while any relief from the fall in energy prices may well be short lived. In addition Turkey faces a number of structural problems - including tax rates which are still high in comparison with competitors, a large informal economy, energy supply bottlenecks, and shallow financial intermediation, all of which need to be tackled to lift the potential growth rate.

Turkish Consumer Confidence Rebounds In July

Turkey Consumer Confidence Index rose in July 2008 for the first time since December 2007. The Index, which was at 75.01 in June bounced back by 2.66% to reach 77.01 in July. When the index is above 100 it indicates an optimistic outlook, while below 100it indicates a generally pessimistic outlook. The index had been setting record historic lows every month since February.




According to Turkstat the increase in the Consumer Confidence Index stemmed from an improvement in consumers' assessments concerning their purchasing power in the current period as well as in the immediate future, together with a positive outlook on the general economic situation. Expectations about job opportunities and current propensity to buy durable goods were also up.

Some sort of increase in consumer confidence was only to be expected in July as optimism mounted that the ruling party would survive being closed by the Constitutional Court.

The main Istanbul Stock Exchange index shot up 18 percent between July 1 and July 29 as optimism mounted that the court would stop short of outlawing the ruling party. The final decision came on July 30, with the court limiting itself to warning the Justice and Development Party not to undermine the country's secular constitution.

Turkey Central Bank Leaves Interest Rates Unchanged in August

Turkey's central bank left its benchmark interest rate unchanged last week, pausing for the time being a rate hike exercise that has seen three months of consecutive increases. Slower economic growth and falling oil prices will undoubtedly start to ease the upward pressure on inflation. The central bank announced that the overnight borrowing rate will remain at 16.75 percent.



Turkey's key rate, which is now the highest among developed and emerging economies, and the recent drop in oil prices are helping to slow consumer-price growth, according to a central bank statement on Aug. 5. The bank has added one and a half points to the rate since May as rising oil and food prices drove up inflation. Price growth reached 12.1 percent last month, the fastest pace in four years.

"Prolonged increases in food, energy and other commodity prices have
continued to exert significant upward pressures on headline inflation in the
second quarter of 2008. As a consequence, 6.8 percentage points of the 10.61
percent annual CPI inflation in June resulted from the direct impact of the food
and energy items"
Central Bank Inflation Report

Producer prices however seem to give the impression that there is still plenty of inflationary pressure coming along in the pipeline. Producer prices were up 1.5% on June prices in July, and by 18.41% over July 2007.



The lira was little changed at 1.1834 to the dollar after the bank decision was announced. The lira has now risen 12% since it hit a 2008 low of 1.3470 against the dollar on April 1 following the decision by the Constitutional Court to hear the case against the AKP, and has been rising steadily since.





In July, the bank raised its forecast for year-end inflation to 10.6 percent from 9.3 percent citing higher oil prices, which it estimated at an average price of $140 a barrel this year. Oil prices have slipped $30, or 21 percent, from the record $147.27 reached on July 11 on signs that global demand is falling because of record pump prices and a slowing economies.


Turkey's industrial output grew at just 0.8 percent in June, the slowest pace this year, according to data from the statistics office earlier this month.




Consumer confidence has set record lows in each of the five months through June.



On the other hand GDP growth accelerated in Q1, to an annual rate of 6.6% following a 3.4% rate in both Q3 and Q4 of 2007.

Turkey National Accounts Revision

This post is a bit belated, but I am only now finding the time to go through the Q1 2008 data for the Turkish economy. Basically in March 2008, the Turkish Statistical Institute released revised national accounts data for the period 1998 to 2007. The revision, which completes a four-year exercise that involved technical assistance from the IMF and Eurostat, largely aligns standards and methodologies with the European System of Accounts 1995 and introduces a more recent base year (1998 instead of 1987). The revised national accounts data are now based on sources that have a broader coverage of formal and informal economic activity. The new Census of Industry and Business Establishment, in particular, represents a marked improvement in the coverage of economic activity in manufacturing (surveying 28,000establishments versus 11,000 for previous annual surveys), mining, and business and personal services.


Similarly, the new Labor Force Survey provides a better yardstick to measure the extent of the informal sector due to its increased sample size and accuracy. The incorporation of the 2000 Building Census, which shows a significantly greater stock of housing than previously estimated, also resulted in a significant upward revision to the value of paid and imputed rental services. Meanwhile, the use of finer levels of statistical disaggregation of products resulted in a much more reasonable series for changes in inventories, which in the previous national accounting system had reached implausible levels.

The new national accounts data feature an upward revision of nominal GDP for the years 1998-2006 of between 26 and 32 percent. On the production side, the revisions imply, above all, a larger weight of the service sector. This is matched, on the expenditure side, by a large upward revision in private consumption with balancing reductions in the investment and export shares.


The revision also altered recent growth dynamics somewhat, due to changes in relative prices resulting from the updating of the base year and improvements in methodology and coverage. The revised data show a smoother overall growth profile since 1998, with less contraction during the 2001 crisis, a commensurately weaker rebound, and somewhat stronger growth since 2004. Average growth over the period 1998-2006 increased by 0.4 percentage points, from 3.7 percent to 4.1 percent per year.

The data revisions naturally imply changes to several key economic indicators. The
upward revision to GDP has allowed Turkey to climb the ladder of international rankings of per capita income. At the same time, public debt and the current account deficit are now much lower in relation to GDP. However, gross external financing requirements remain the same in dollar terms, and several commonly used indicators of solvency, such as the ratio of public revenue to public debt and the ratio of exports to external debt, also remain unchanged. Meanwhile, several other indicators have worsened. The decline in the ratio of tax receipts to GDP, for example, suggests even less efficient tax collection than previously thought.