Turkey Economy Watch

Turkey's Audacious Experiment In "Post Modern" Monetary Policy

2011-01-08T12:15:00.007+01:00

The recent decision of the Turkish Central Bank to lower rather than to raise interest rates in an risky attempt to quench the inflation flames that many feel are threatening to engulf what some call an "overheating" economy (or here) has lead to a good deal of heart-searching and consternation in the economic and financial press of late. After all, at the end of the day aren't they doing exactly the opposite of what the text book says they should? Well, as is usual in the realm of the dismal science, all is not exactly what it seems to be.

To put the issue in some sort of context, the background to this decision is undoubtedly Ben Bernanke's move in early November to extend US monetary easing, by going one bridge further in his assault on the housing deflation and continuing high unemployment which weigh down the economy by introducing what effectively amounts to a second round of exceptional policy measures (known coloquially as QE2). The leading objective behind this move was to increase the amount of liquidity available in the US economic and financial system, although a more covert consideration was cleary to weaken the dollar in an attempt to boost exports and use the strength of external demand to tow the US consumer back towards growth territory. Joining up the dots, we find that the key link between these two otherwise seemingly unrelated central bank decisions (after all one is concerned with an economy which is growing too slowly, while the other is working with one which may be growing too quickly) is to be found in the fact that the US economy is already saturated with as much liquidity as it can handle (in terms of the capacity for absorbtion of the domestic sector) and as a result the funding made available works its way through to more attractive, and more profitable outlets across the developing world.

So what has happened in practice is that large quantities of liquidity have been been seeping out of the back door, some of it undoubtedly heading over to Europe in the search for the reasonably safe but still quite attractive pickings which have become available due to the Sovereign Debt Crisis, but the lions share is surely making its way towards those, seemingly "risky" rapidly growing emerging economies.

This has lead to a certain amount of angst and confusion among developed economy political leaders, with Angela Merkel, among other European politicians, voicing the complaint that the financial markets are effectively "mispricing" risk. Personally, I don't claim to have any special insight into whether or not the markets are pricing risk well, or badly. I would have thought that that was exactly why we had markets in the first place (rather than a centrally planned pricing mechanism): to put a price on risk. But that being said, the systematic downgrading of the ageing developed world and the systematicup grading of the youthful "growth" economies in the third world has a certain logic to it.

Obviously, in a world which is as rapidly changing as ours is, markets need time to adjust. And market participants are evidently a vulnerable as anyone else is to the human failing of getting things wrong. Markets are not superhuman entities, their outcomes are the aggregated product of a very large number of individual human decisions. But I think it is important here that all concerned recognise their own limits and limitations. It is either an extremely bold or an extremely foolish politician who feels equipped to move to a higher level to pass judgement on a process whose outcome is still remains an open question. Post hoc, as we have seen in the wake of the recent financial crisis, there is no shortage of critical voices, and all and sundry have a notable facility to point the accusing finger to tell the markets "you got it wrong"! But telling them you have it wrong before the event, well that takes gall! And if you are really so sure, then put your money where your mouth is, and buy up all that debt the markets evidently don't want.

In fact, markets are neither omniscient, nor omnipotent, and often move as much behind the curve as they do in front of it, correcting to changing undelying realities in a herd-like fashion and even then only after a time lag. Yet, as I say, there is a certain logic behind the most recent trend, which involves repricing risk in the developed economies (due to their ageing populations, and large uncovered obligations with the future, issues whose importance was not sufficiently appreciated and accounted for in the pre-crisis world ), at one and the same time that risk in the developing world is also repriced, since emerging market "risk" may not be quite so risky as the "old normal" mindset used to think it was.

As a result, a number of key emerging economies find themselves in the pleasant position of enjoying the benefits of a win-win dynamic, since far from struggling with ever higher elderly dependency ratios, the proportion of their population in the labour force (and also in employment) is now rising constantly, while both inflation and interest rates (including ones related to country risk) are trending downwards in the longer run. Turkey is, in fact, one of these fortunate economies, which is why I think the latest move from the Turkish central bank needs serious consideration, and should be understood not as just one more piece of "midwinter madness", but rather seen as part of a much more calculated and comprehensive strategy which comes from a modern and continually evolving tool set. New problems need new remedies, so let's leave small open (and even large open) economies where they belong: in the unreal world of the academic textbook. In today's world interest rates are not set locally, and excessive domestic inflation is often produced more by the dynamics of global capital flows than by the irresponsible spending decisions of local politicians. Which is not to say that the Turkish central bank have the balance right (or wrong), but simply to state that global problems require global solutions, and in the meantime, national leaders will have to adapt their policy mix to confront new problems, problems which but a few short years ago would have seemed almost unimaginable.

Complex Problem Set With A Positive Outlook

As Erdem Basci, deputy governor of the central bank recently argued, strong capital inflows (see chart below), fuelled by quantitative easing in developed economies, are in danger of producing the undesireable outcome of distorting economic development in emerging economies and potentially fuelling asset bubbles in the longer run. According to Basci, as argued in a posting on the central bank website, the best policy response to this thoroughly modern problem is to try to make these countries less attractive to short-term investors by cutting interest rates in a step-by-step process (a move which would also make the country more attractive to longer term investors - think FDI), while making extensive use other tools to attack the excess liquidity problem and restrain domestic credit growth.

And so it was to be, since the central bank's monetary policy committee voted at its most recent meeting to cut the reference lending rate by 0.5% (to 6.5%). This move was rapidly followed by the second of the steps advocated by Basci, since the bank then announced that the required reserve ratios (RRRs) for Turkish banks would be lifted to 8%, a move was expected to drain an estimated 7.6 billion Turkish lira (or $4.9 billion) from the economy in one foul swoop, with the objective of reducing the amount available for Turkish banks to lend to their clients.

Now in order to make sense of this decision, the key point to grasp is that Turkey's economy is not, in fact, currently overheating. At the present time, the very opposite is happening, since the economy has been slowing, with the quarter-on-quarter growth rate falling in the third quarter to a "mere" 1.1%, down from the sweltering "China like" pace of 3.7% clocked up between April and June. Now a 1.1% quarterly GDP growth rate (or a 4.4% one annualised) is not exactly small beer by present developed economy standards, but it certainly is not overheating territory for an economy in the process of making the shift from underdeveloped to developed status in the way that Turkey's is.

Nor is inflation showing signs of getting out of hand. True, at around 7% it is still stubbornly high, but it has been stabilised, and shows no sign of getting out of hand, while the core inflation rate has been falling steady, and is now around 3%. So while the situation signals caution, it hardly cries out for drastic monetary tightening.

So what the recent decision was really about was not an attempt to conform with the objectives of conventional monetary policy, rather the move was intended to dissuade and deter speculative investments looking for higher yields from continuing to pour into Turkey and magnifying the economy’s key weakness: the mushrooming current-account deficit. The idea was to reduce the yield differential with lending rates in the quagmired developed economies.

So the problem facing Turkey's policy makers is not the economy isn't growing, or that it is growing too quickly (there is plenty of spare capacity left out there), rather the problem is that it is growing in an unbalanced way. The high yield differtial, and the funds inflow which it is producing, means that the currency is appreciating even while inflation remains excessively high (now stuff that in yourtext book and smoke it), and this combination is a sure fire way for the export sector to lose competitiveness. And this is in fact what is happening, as imports (driven by the consumer credit boom) surge, while exports fail to keep pace, with the result that the trade balance deteriorates, and along with it the current account one.

But as Erdem Basci among others, including some IMF economists, argue, hiking interest rates could be totally counterproductive in the current climate since it might well serve to make the country even more attractive (by increasing that key yield differential) to precisely the kind of funds they want to deter. Turkey, as many analysts constantly point out, has become over-dependent on the wrong kind of funding to finance its current account deficit. What Turkey needs is to attract longer term investment finance, and while reducing the volume of short term speculative finance which is currently distorting prices in the country's equity markets. This argues for lower, not higher, interest rates, since bringing the longer run cost of borrowing down should make the country more attractive to the kind of investor it needs.

So the bank have decided to adopt a monetary experiment based on a resort to other measures, and the first of these is an attempt to withdraw some liquidity from the banking system. One of the principal worries is that the rapid expansion in the volume of domestic credit has triggered a rise in imports and thus aggravated the deterioration in the current account deficit. But the problem is not only a current account deficit one. The following chart (prepared by staff at the Turkish economicresearch institute TEPAV) shows that the credit expansion is also associated with a rise in the systematic risks of the banking sector, since much of the lending is evidently being financed by short term fund flows.

[Please Click on Image to View More Clearly]

Net foreign financing of Turkey's banking sector hit US$17 billion in the last quarter of 2008. Subsequently the level fell rapidly, but with the economic recovery foreign funding has once more been on the increase, an as of October 2010 it was in the region of US$22.5 billion. One important characteristic of the foreign funding the Turkish banks have been accessing since the advent of the recovery is that something like 98 percent of the funds are short term. This sharp rise in short term funding is not only unprecedented, it is also highly dangerous, since were there to be a sudden change in risk sentiment (due to factors which had nothing directly to do with Turkey itself), such funding might not be renewed, leading to a maturity mismatch between the banks' borrowing and lending which could severely strain the Turkish financial system.

The central bank is therefore pretty concerned to slow the rate of credit expansion, and with this in mind it has also introduced a second bloc of measures involving steps to contain the rate of expansion in consumer credit - credit card restrictions, increased loan to value ratios in house purchase, etc. Due to the endless ability of those who are smart enough to find ways to get round such rules, none of these are perfect, but they are a lot better than nothing, and nothing, some will remember, was those responsible for managing the Spanish and Irish economies did when their credit and indebtedness ratios were obviously on the verge of getting out of control, and when the relevant central bank seemed to see no inconvenience at all in applying negative interest rates to their already credit-bloated economies. So by all means criticise the Turkish central bank, but let's be clear what (and who) we are comparing them with.

Obviously additional measures could and should now come from the Turkish government. Measures which involve the judicious (and even aggressive) use of fiscal policy to drain in the most direct fashion excess demand from the system. In this context it is pleasing to be able to note (see below) that this year's strong rise in tax revenues is not being matched by an equivalent increase in spending. Indeed the country is now running a quite strong primary budget surplus. More of the same, and then some, is what we need to see, but with elections looming it is doubtful decisive steps will be taken until the new government is formed.

And it isn't only rapidly growing credit that is a concern, a lot of the money has gone into Turkish stocks which are now not far off their 2008 pre-crisis highs. In fact foreign purchases of Turkish financial assets rose to around $15.5 billion in the first 10 months, from $730 million a year earlier, according to central bank data. In October alone, international investors bought $969 million in shares and $1.5 billion in government bonds.

Summing up, it is hard to say at this point whether the Turkish central banks attempt to operate what some have called a "post modern" monetary policy will work exactly as intended, especially since the outcome is not directly in the hands of the central bank, and very much depends on the determination of the government to take the necessary measures on the fiscal side. But whatever the outcome, of one thing we can be sure: doing something always has to better than doing nothing. After all, who else would knowingly and willingly wish to end up in the kind of unfortunate situation Spain and Ireland now find themselves in?

The Economy Has Surpassed Pre-Crisis Levels, And Is Now In Full Recovery Mode

Turkey's economy slowed in the third quarter, and the pace of GDP growth slipped back to a calendar adjusted 6.4% year on year in the third quarter, down from the China like 10.2% pace registered in the second one. The key to the slowdown was the deterioration in external trade: exports dropped by 2% year on year, the sharpest contraction since the third quarter of 2009, while import growth remained in double-digits for a fourth consecutive quarter (albeit slowing marginally to an annual increase of 16.9% from 18.8% in the second quarter).

Final domestic demand growth, on the other hand, strengthened to 11.2%, its fastest pace of advance in more than four years. Private consumption growth was strong, and surged by 7.6%, but the heavy lifting seems to have been done by investment (much of it in construction), with an increase in gross fixed capital formation of 31.3%. Even if the underlying housing boom offers the explanation for much of this growth, capital goods investment was also strong, as shown by the fact that the import of capital goods rose by an annual 31.3%.

In fact, the most worrying part of the Q3 performance was not the fall in exports, it was the surge in imports, and the impact this is having on the trade and current account balances. Correcting this disturbing trend must now be one of the most important policy priorities for Turkish decision makers. Consensus forecasts now suggest Turkey could well grow by an annual 7% this year (up from an earlier expectation of 6%) and this does not seem to be at all unreasonable,

Whatever the weaknesses, the big picture story is that Turkey’s economy is once more growing dynamically and reaching new highs. Real economic gains are being made and we now are seeing increasing evidence of a true recovery which goes well beyond the confines of a simple statistical rebound.

But a dose of realism is called for. Despite the fact that the economy will in all probability now grow by at least 7% in 2010, in 2011 Turkish growth rates will undoubtedly continue to drop back from the very high level seen in the first half of this year, but if this weakening in headline GDP numbers is simply the result of a deteriorating net trade position then we will have the worst of both worlds, as debt driven consumption growth will be faster than desireable, while the export sector will continue to weaken, even as import substitution undermines the domestic industrial sector. Unchecked this could lead to the same sort of manfuacturing industry job loss we have seen across Southern Europe over the last two decades.

On the other hand, the Turkish economy is likely to continue turning in an impressive performance, one which will stand out among regional peers since sustainable trend growth in Turkey remains high. If adequate steps aretaken to rein-in the current account deficit, and to attract more in the way of job-creating FDI, 6% growth could well remain a realistic target for 2011, even if there is a deterioration in the external environment and a weakening in the level of external demand.

One factor which makes Turkey stand out from many of its regional peers is that it is not overly export-dependent and has a dynamic domestic economy which complements the export sector. This means that the Turkish economy basically stands upright, and on both feet, and that, despite the recent loss of export competitiveness the impetus behind GDP growth is much more broadly-based than in the other, heavily-indebted countries which can be found in the surrounding region. In addition, the underlying strength of domestic demand means the Turkish government has a far broader, and ever-growing, potential tax base. This makes it much easier to attain longer term fiscal stability, and means that the country does not have to continually stagger forward on the basis of a series of “one off” measures to keep the deficit undercontrol.

To some extent the slackening in Turkey's growth performance is only to be expected, since, in terms of external demand (and as in many other economies) all the "low lying" fruit has now been picked as exports have steadily attained their previous level. Reaching out for the rest will now become more and more difficult, especially with so much "deleveraging" going on in the neighbourhood, and so many export dependent economies in the region, which is why the export competitiveness issue needs to be so strongly stressed.

Thus, while Turkey turned in an 11.7% annual growth rate in the first three months of the year, and then followed up with an impressive 10.3% in the second three – a rate only equalled by China among the major economies – the calendar adjusted 6.4% rate registered between July and March is better read as a return to normality rather than the commencement of a serious slowdown. Quarter on quarter the economy grew by a seasonally adjusted 1.1%, and output was still up by 8.2% in the first nine months of the year over the equivalent period in 2009.

On top of this, the economy is now reaping the long run fruits of major macro economic restructuring in the early years of this century, while in addition the country faces a very favourable demographic evolution. The result of this very fortunate combination is that the dollar denominated value of Turkish GDP is now very substantially above where it was ten years ago, and now that the recession is behind us it should continue to rise rapidly.

Current Account Woes

Throughout this year the negative balance on Turkey’s current account has steadily worsened, and the trailing 12 month deficit total in October was around $40 billion, or 5% of GDP. This underlying deterioration in parts reflects the country’s energy dependence and the impact of rising fuel costs, but it also gives a measure of the strength of the domestic consumer rebound coupled with the impact of the inflation-driven real exchange rate appreciation.

Turkey has had a long history of persistent current account deficits, and as might have been expected while the problem eased during the recession, the arrival of the recovery slammed issue straight back onto the table. During last year’s sharp contraction, Turkey’s current account deficit fell back to 2.3% of GDP, and the topic moved quietly off everyone's radar. But last year's reduction was due to very exceptional circumstances (the sharp contraction in domestic demand during the global financial crisis), so this years widening of the deficit to a level which could eventually be as high as 6% of GDP (or even slightly over) is essentially a reversion back to type. Which does not make it any the less problematic.

When thinking about competitiveness, as well as simple exchange rate movements it is also important to take inflation differential's into account. Indeed the Turkish currency has been weakening recently on the back of the European Sovereign Debt Crisis, and the lira fell to a five-month low against the dollar following the central bank announcement of the latest measures. But even prior to the rate reduction the lira had been falling, and is now down around 7.5% against the US dollar since November 4 as concern has grown about potential economic spillovers to Europe's trading partners from the growing problems in countries like Ireland, Spain and Portugal. Weakening European demand is not good news for Turkey, since Europe is Turkey's main trading partner.

Thus while the lira rose by something like 9% against the euro last year the net 2010 gain against the dollar (before the post-November 4 slide) was only about 4 percent. However, given the much closer trade ties that Turkey has with the EU, it was the Euro rate which mattered for the export performance.

Although Turkey's exports were up sharply in October (to $11 million), after several months stuck around the $9 million mark, the improved performance was not sustained, and in November they fell back again to around $9.4 billion.

But of course, in the complete picture we would have to note that imports (and with them the trade deficit) have also continued to rise steadily, although at $17.1 billion in November, they were still some considerable way below the July 2008 high of $20.5 billion.

The seasonally adjusted trade deficit has continued to deteriorate steadily since the recovery started in late 2009.

Domestic Activity Also Rises

The recent recovery in manufacturing activity continued at full pace in October, with industrial output posting an annual increase of 9.8%, well above the 6.1% market consensus expectation. Following a tame performance in September, where seasonally adjusted output stayed flat at the August level, production surged again in October, and by an eye-catching 3.1% on the month. It is worth noting that industrial production has now returned to pre-crisis levels, implying that (even though overheating is not an issue at this point) the output gap may be narrowing faster than central bank projections anticipate.

The better-than-expected increase is largely due to a strong performance in both capital and consumer-durable goods. Capital goods were up by an annual 25.6%, and consumer durables by 21.7%. While the numbers for consumer durables reflect the expansion in consumer credit, the ongoing strong performance in capital goods suggests that the investment activity also continues apace.

And the continuing strong performance registered in December's manufacturing PMI suggests the short term outlook for the Turkish industrial sector remains positive.

Commenting on the Turkey Manufacturing PMI survey, Dr. Murat Ulgen, Chief Economist for Turkey at HSBC said:

““The Turkish manufacturing sector maintained November’s impressive performance in December, expanding at its fastest rate since May. The pace of output and new order growth moderated slightly from the previous month, though still remained impressive. New export orders, on the other hand, showed the fastest improvement since October 2009. More encouragingly, this bright picture supported employment creation with conditions reaching their best level ever in the survey history. Backlogs of work increased marginally in December, while manufacturers continued to slash their finished goods inventories to meet order demand. In the meantime, this stellar performance also led to some price and margin pressures. Input prices soared at a very high rate, reminiscent of 2008 Q1 with rampant global commodity prices, whilst suppliers’ delivery times lengthened at a close to record rate. As such, manufacturers continued to reflect this in output prices that rose at the fastest pace in eight months.””

Surprisingly, while retail sales continue to grow steadily, up to now they have not been one of the leading drivers of the current expansion, as indicated by the fact that the third quarter increase was only 7.5% over a year earlier. Not bad by developed economy standards, but well short of the level of construction investment increase, for example.

Unemployment Falls Even As The Labour Force Grows and Grows

Still, the outlook on domestic sales continues to improve, and one of the principal reasons for this is the continuing fall in the seasonally adjusted unemployment rate, which was down to 11.8% in September. In fact unemployment peaked (on a seasonally adjusted basis) at 14.8% in April 2009, and has since been falling steadily, while the seasonally adjusted level of employment continues to rise. Such strongly positive co-movements in employment and unemployment evidently lead households to have an increased sense of job security and purchasing capacity.

The country has been creating and continues to create jobs in large numbers. When compared with September 2009 the number of those employed rose by nearly a million (to around 23 million), with the share of those occupied in the industrial sector (around 20%) rising significantly.

Under the impact of the global financial crisis, Turkey’s unemployment hit a record high of 16.1% in February 2009. A year and a half later, and in sharp contrast with most of its regional peers, the country has achieved an impressive drop in its jobless rate. Even more significantly, Turkey has achieved this improvement at a time when the size of the labour force has been rising sharply, from 51.3 million to 52.7 million. This is yet another example of how Turkey is in a very different position to its regional peers, most of whom face ageing and declining labour forces due to their negative demographic trends.

In its bid to achieve ultra-fast "catch-up" economic and employment growth without generating excessively high inflation Turkey is able to benefit from the phenomenon known as the “demographic dividend.” Cutting aside the rigmarole, what this idea basically implies is that as fertility falls ever higher proportions of the population are to be found in the working age category, initially boosting employment and output, and then, in a second wave, fuelling productivity, credit and consumption growth. This is what sets the Turkish case apart, for example, from the recent experiences in places like the Baltics and Bulgaria.

As the country's median age rises, Turkey is rapidly approaching that demographic “sweet spot” where sustainable rapid catch-up growth is totally realistic and achievable. However, it is important to bear in mind that this process is far from automatic, and depends for its effectiveness on continuing and deep structural reforms. The Turkish economy still fails to make satisfactory use of its existing labour resources, and the country’s employment rate, at just above 40%, remains the lowest in the OECD area. Deep-rooted socio-cultural factors, combined with the steady drift from rural to urban areas, mean that many Turkish women continue to withdraw from the labour force on marriage, which leaves the employment rate for women stuck around the 20% level, 40 percentage points lower than the equivalent rate for men.

Turkey's population has been growing rapidly, and will continue to grow quite rapidly for at least the next two decades. This will mean there will be an internal market with a strong growth dynamic, and that the country faces a more stable population pyramid in terms of pension and health care systems, and sovereign debt sustainability. This outlook also implies improving credit ratings and lower risk evaluation on the part of investors, with consequently lower interest rates for investment projects.

As I say, Turkey's median age is also rising, although the country is still very young, with a median age of just 28.5 and 30 per cent of the 74 million population under 18. The demographic "sweet spot" of median ages between 30 and 40 is thus set to last for some considerable period of time.

Rising median ages, and growing proportions of the population in the working age group are a product of two distinct forces, declining fertility and rising life expectancy. Turkey's fertility has been falling steadily for the last thirty years, and is now around the critical 2.1 replacement level. The key driving force behind the change is female emancipation and rising education levels. The difficult thing for the country now will be to arrest the fertility decline and maintain the birth rate around the replacement level. Unfortunately, absent a serious and sustained change in the policy approach it is far more likely that Turkey will follow the pattern already seen in Southern and Eastern Europe, and head towards very low (and therefore unsustainable in the long run) fertility levels.

Rapid Growth With Low Inflation?

Given the controversial nature of the new monetary policy experiment, it is highly the country's inflation rate will come under increasing scrutiny. After keeping its benchmark interest rate unchanged at 7% since November 2009, the central bank has now lowered the rate to 6.5%, even as the economy continues to show signs of strong growth in credit driven consumer demand.

The bank have justified their decision by highlighting the fact that core inflation rate is falling, and in fact came in under their year-end target for the first time since the central bank introduced an inflation targeting regime. They also strongly draw attention to the potential negative consequences of raising rates in an environment where this may only accelerate the inflow of short-term, speculative funding. Given that one of the key objectives of the central bank has to be reducing the level of interest rates in order to make it easier and more attractive to invest, the bank is likely to show great reluctance in moving towards monetary tightening and will most probably continue to rely on other tools to keep inflation in check, such as increasing reserve requirements to control credit growth.

Since the start of the crisis the central bank have lowered rates 14 times from their October 2008 high of 16.75%. The Bank’s stated objective is to bring the level of interest rates permanently down to well below their long term historic levels. Their ability to do this, however, is conditional on their success in reducing the endemically high levels of inflation which have continually plagued the economy.

Certainly Turkey’s inflation rate is now extremely low compared with levels considered typical only a decade ago, but it is still an upside outlier in comparison with regional peers, and in recent months it has been showing renewed signs of an uptick.

Despite the country’s secular disinflationary tend, inflation has remained stubbornly high in recent months, although it did fall for the third consecutive month in December, registering a 12 month low of 6.4%, and down from the 9.3% seen in September. Nevertheles this level is still way too high for comfort, and especially in the context of an appreciating currency. The December inflation drop was largely due to a fall in volatile food prices, which were down 2.7% from November. The ex-fresh-food-and-energy core reading has been falling all year, and stood at 3.18% in December.

This core inflation is one of the central bank’s preferred measures of underlying inflation, so they will have drawn some comfort from downward rend, but they will also have noted that producer prices rose by an annual 7.73% in December (as compared with 4.16% in December 2009), a detail which may not alarm them at this point, but which will certainly give them food for thought if the rate remains high as 2011 advances.

Public Indebtedness Is Not A Serious Problem

After many years of extremely high government deficit, Turkey has been remarkably prudent since the turn of the century . The country’s fiscal deficit has remained low since the implementation of the IMF programme, and this despite the recent crisis-generated increase. As a result, with low deficits, strong growth and high inflation debt to GDP has fallen steadily (don't start letting your mouth water Greece, this combination is impossible in a currency union). Driven up by the recession, the deficit hit 5.6% of GDP in 2009, and according to IMF projections it is expected to fall back again to 3.4% in 2011. Gross debt peaked at 45.5% of GDP in 2009, and is in the process of falling back steadily, although we shoudn't get too excited about this, since it is what you should expect to see in a country with such a comparatively young population: real pressure on the sovereign will only start as and when the population median age rises to current EU levels .

So there is little room for complacency. The recent decision by the Turkish government to shelve the proposed Fiscal Rule legislation (a measure which would have permenently committed the government to target a 1% fiscal deficit) has come in for a lot of criticism, most notably from the IMF. But caution is called for here, since the decision most likely reflects the government’s concern not to prematurely tie its hands in the face of what might be a quite closely contested election in 2011. So a wait and see attitude might be more appropriate before passing any kind of definitive judgement.

Certainly the data we have to date show quite a strong fiscal performance throughout 2010, with the government posted a primary budget surplus of TRY4.6 billion in November compared with a TRY1.2 billion deficit in the same period of 2009. Central government revenues rose by an impressive 42.4% YoY in November, while expenditures rose by 22.9%. In fact November’s results bring the year-to-date general budget deficit to TRY23.5bn – almost half of the budget deficit in January-November 2009 – and the primary surplus to TRY 23bn (Jan-Nov 2009: TRY 5.8bn), which means last years budget deficit may well come in at under the EU limit of 3%, and will in any event be significantly below the government target of 4% So despite credibility slippage, in the short term the strong economic expansion may well assuage concerns about longer term sustainability. What really matters is what happens this year, and in the years which follow. The government has budgeted for a 2.8% fiscal deficit in 2011, and given the credibility issues involved I wouldn't be surprised to see them keep to this, despite the coming election.

However, in taking what seems to be the easier path now and postponing the watertight commitment to fiscal stability for some moment in the future, the government may be storing up trouble for itself or its successor. Spending excess tax revenues is only stimulating an economy which is not in need of stimulation, whereas saving them would not only be building a cushion for the future, it would also help reduce pressure on the current account deficit by draining some demand from the economy.

Private Sector Debt Not A Problem At This Point Either

Nor is the level of private sector debt a problem, since even though it has been rising rapidly of late, the level (at around 35% of GDP) is still quite low, and relatively sustainable for a rapidly developing country.

Household debt which has been rising at rates close to 40% this year should be brought under greater control, since while current levels are not worrysome, letting these growth rates continue is not desireable.

The same goes for housing loans. The current boom in construction activity and household mortgage lending is fine, but it does need to be kept in check.

Outlook: Steady Growth, Falling Long Term Interest Rates and A Round Of Credit Rating Upgrades

So 2011 looks like it will be a pretty good year for Turkey. Of course, not everyone is convinced by the new monetary policy initiative, and the IMF have been quick to warn of the dangers. In particular they warn about the continuing practice of unsterilsed purchasing of foreign currencies. The answer here is not too difficult: sterilise, that is withdraw liquidity to compensate, which is what the bank seems intent on doing via the increase reuqired reserves.

However the IMF also warned of the danger that, even if sterilised, large purchases by the central bank could become unsustainable, given the aggressive nature of the liquidity withdrawals which would be required to maintain the stance. Undeterred by the davice, on 21st December 21st Bank Governor Durmus Yilmaz announced that the Bank was not only set on continuing its policy of carrying out forex purchases, it was actually going to increase them, taking the amount of its daily foreign-exchange purchases (as of January 3rd 2011) from US$40m to US$50m. It is quite possible the IMF have a serious point here, and the bank may do well to consider more actively their proposal that the Bank apply the increased reserve requirements on both TRY and forex denominated accounts, and that they also extend coverage of the requirements to other credit providers and instruments in an attempt to rebalance the maturity profile of their borrowing, ie reduce their dependence on short term borrowing.

On the other hand, while one EU sovereign after another finds itself facing ever increasing borrowing costs, the process in Turkey moving in the opposite direction. Just last week Turkish bond yields extended a record low, registering their steepest two-day decline in almost eight months on speculation inflation will continue to slow, thus allowing the central bank to cut its interest rates even further. The Turkish lira depreciated to its weakest levl in six months last week, touching 1.5683 per dollar at one point last Friday. The yield on the benchmark two-year lira bond closed the week at 6.98 percent after the two-year debt yield fell below 7 percent for the first time ever on Wednesday.

So far, then the policy is working, even if it is early days yet. Lower bond yields may also be favoured by forthcoming credit upgrades. Fitch Executive Edward Parker stated last month that while the Central Bank faced many challenges in 2011, Turkey’s sovereign credit rating would be positively affected if the new policy proves successful. Fitch currently has a local and foreign-currency bond rating for Turkey of BB+, one level below investment grade.

He also noted that Turkey’s sovereign rating would be positively affected if Turkey’s debt to GDP ratio continued to decline and if there were no change in political stability following the general elections. In effect it is not likely that Turkey will become an investment grade country until after the June general elections since the rating agencies will want to see the results of the revised monetary policy stance, the fiscal performance ahead of the general elections and the political landscape following them before making this kind of rating upgrade. That being said, it is perfectly possible that both Moody’s and S&P's (which currently rate Turkey at Ba2 and BB, respectively, that is more than one notch below investment grade) could make an initial upgrade in Turkey’s sovereign rating (by one notch say) even before the general elections are held.

The outlook for Turkey is thus extremely positive, even if there are concerns about the short term bias in bank funding, and longer term worries about structural distortions from the current account deficit. On the fiscal side the government is likely to have reduced the budget deficit to below 4% of gross domestic product in 2009 from 5.5% in 2009, and is quite likely to fulfil its targe of 2.8% this year, making it one of the very few countries in the EU orbit to come in with a deficit within the 3% official target level. So while there are no guarantees that the latest initiative from the Central Bank will work, there are grounds for hope and expectation that both they and the government will make changes and search for solutions even if they don't.

Facebook Links

2009-06-20T12:28:00.000+02:00

Quietly clicking my way through Bloomberg last Sunday afternoon, I came across this:

Facebook Members Register Names at 550 a Second

Facebook Inc., the world’s largest social-networking site, said members registered new user names at a rate of more than 550 a second after the company offered people the chance to claim a personalized Web address.

Facebook started accepted registrations at midnight New York time on a first-come, first-served basis. Within the first seven minutes, 345,000 people had claimed user names, said Larry Yu, a spokesman for Palo Alto, California-based Facebook. Within 15 minutes, 500,000 users had grabbed a name.

Mein Gott, I thought to myself, if 550 people a second are doing something, they can't all be wrong. So I immediately signed up. Actually, this isn't my first experience with social networking since I did try Orkut out some years back, but somehow I didn't quite get the point. Either I was missing something, or Orkut was. Now I think I've finally got it. Perhaps the technology has improved, or perhaps I have. As I said in one of my first postings:

Ok. This is just what I've always wanted really. A quick'n dirty personal blog. Here we go. Boy am I going to enjoy this.

Daniel Dresner once broke bloggers down into two groups, the "thinkers" and the "linkers". I probably would be immodest enough to suggest that most of my material falls into the first category (my postings are lo-o-o-ng, horribly long), but since I don't fit any mould, and Iam hard to typecast, I also have that hidden "linker" part, struggling within and desperate to come out. Which is why Facebook is just great.

In addition, on blogs like this I can probably only manage to post something worthwhile perhaps once or twice a month, and there is news everyday.

So, if you want some of that up to the minute "breaking" stuff, and are willing to submit yourself to a good dose of link spam, why not come on in and subscribe to my new state-of-the-art blog? You can either send me a friend request via FB, or mail me direct (you can find the mail on my Roubini Global page). Let's all go and take a long hard look at the future, you never know, it might just work.

Are There Really Green Shoots In Turkey?

2009-06-08T14:16:00.000+02:00

First off, I would just like to say sorry to any readers this blog may still have. I have been occupied these last months following the crisis elsewhere. Now I have finally found the time to take a look at Turkey again. This post is a work in evolution, so please bear with me. It is more like working notes which I will be constantly adding to over the next 24 hours.

But before I go any further, let me put something completely up front. I have a stake in Turkey. Not a financial stake, but an intellectual one. Turkey is an important test case. Does Demography Matter to economics, or doesn't it? If it does, then what happens in Turkey will be important, since Turkey's demographics are quite distinct from those to be found in other parts of Eastern Europe. As I say in this post (written less than a month after the sub prime crisis broke out in the United States at the start of August 2007):

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.

What do I mean by not so badly snared? Well, in the first place Turkey is still in a "will-she won't-she" situation as far as whether or not she will need to once more seek protection from the IMF and apply for a loan. In the second place, when the recovery comes I would expect to see Turkey rebound far more rapidly, and sustainably, than more of the EU12 group of European Union "Accession" countries. So this is a clear test, and I think it is important that people should try to see it that way.

In fact the Turkish Central Bank recently presented some charts which seem to back my initial intuitions here. The first (left hand side) shows the general JPMorgan EMBI+ bond index, as compared with the Turkey specific EMBI+. While the second compares the Turkish Lira (TRY) with a weighted currency index for Central and Eastern Europe Index: Czech Republic, Croatia, Hungary, Lithuania, Poland, Romania, Slovakia and Ukraine. In both cases, Turkish performance is well above that of an "average pupil". (Please click on image for better viewing).

April Output Falls but May Purchasing PMI In Positive Territory

Now the first thing to notice is how Turkey has been directly affected by the global crisis, and some of the best evidence for this is to be found in the fall in industrial output. According to the latest data from the Turkish Statistical Office industrial production dropped 18.5% year-on-year in April, after a 20.9% fall in March. Economists expected a decline of 18%. Manufacturing was down an annual 20.6%, while mining and utilities output were down 5.4% and 5.3% respectively. In fact the biggest drop was in capital goods production, which fell 41.8%. There was however, one bright spot. Month-on-month, industrial output climbed 1.4% in April. Do we have a green sprout here?

Certainly Turkey's latest manufacturing PMI might give us some cause for hope, since the index rose to 51 in May from 44 in April, according to the Markit Economics survey. Only a whisk above the 50 dividing line, but enough to put Turkey - along with India and China - in that very illustrious group of economies where the industrial sector is now expanding.

Some confirmation for the PMI comes from the monthly capacity utilisation survey (see chart). According to the May results, the rate of capacity utilisation (70.4%) was down by 12 points as compared to May 2008, but increased by 3,6 point compared to April. Capacity utilisation hit bottom in January/February at 63.8%.

Export Slump

Part of the problem which has affected the Turkish economy, like many others, has been the slump in world trade, and the consequent decline in exports. Turkish exports fell in April by 33.3% (to 7 576 million USD) when compared with April 2008 while imports decreased by a massive 43.4% (to 10 119 million USD on the year). At the same time, as can be seen from the second chart below, the level of exports has now been more or less stable since the end of last year.

Given the size of the export drop the goods trade deficit has been decreasing on an interannual basis, and was down by 61% in April from April 2008, falling from 6 525 million USD to 2 543 million USD, although it has rebounded somewhat from the February low point.

Lira On The Rebound

Turkey’s currency weakened to 1.5432 to the dollar at 5:13 p.m. in Istanbul last Friday (on the back of Latvia worries), down from 1.5332 a week earlier. Nonetheless it has still now gained 19 percent since early March, following the sharp devaluation between September and November 2008. (Please click on image below for better viewing).

Inflation Stubbornly High

Turkey's Consumer Price Index was up by an annual 5.24% in May, and by 0,64% over April.

The Producer Price Index fell in May, however, and was down by 0.05% on April, and by 2.46% on May 2008.

Interest Rates Come Down

Despite continuing inflation the central bank has now cut its benchmark interest rate by 7.5 percentage points in the past seven months - largely because of continuing weakness in the economy - and it is now at a record low of 9.25 percent. Despite the fact that industrial output fell by an average of 22 percent in the first three months of the year, central bank Governor Durmus Yilmaz said at the start of this month that he expected the decline to “stabilize” in the second quarter.

Consumer Confidence

The Consumer Confidence Index, which was 74.77 in March, increased by 8% to hit 80.75 in April. Despite the small recent increase the index is still at historically very low levels.

GDP Contracts

In the fourth quarter of 2008 gross domestic product was down by 6.2% compared to the same quarter of previous year.

Domestic demand was down sharply as both private consumption and contracted strongly. Private consumption was down 4.6% year on year, and machinery and equipment 25.3%.

(Please click on image below for better viewing)

Exports fell 8.2% over Q4 2007, while imports fell 23%. As a result the impact from the trade balance was positive for GDP (see below). On the other hand industrial output, construction activity and services all fell.

As can be seen from the next chart, the car stimulus programme has been pretty important in the industrial output recovery, especially since capital goods output is still down in the doldrums.

Labour Force Survey

Turkey's working age population increased by 860,000 in February over a year earlier, a fact which underlines the fact that Turkey's population is still growing rapidly. In fact it was up by 820,000 and reached 70.236 million, while the working age population reached 51.360 million.

Unemployment has been rising steadily, and is now up from a low of 8.9% in May 2008, hitting 16.1% in February. A total of 3.8 million people were officially classified as unemployed in February.

The number of those employed decreased by 85 thousand in Fenruary compared to the same period of the previous year and reached 19.779 million. Agricultural employment increased by 206,000 and non-agricultural employment was down by 291,000.

Turkish assets also fell last week on broader concerns about valuations in emerging markets and after U.S. economic data disappointed investors seeking signs of a recovery in the world's biggest economy. Bonds and the lira also weakened after May inflation was higher than expected and following Thursday's announcement of an incentive package to lure investment and boost employment that may strain the budget and force the government to issue debt.

The main share index rose 1.4 percent to 34,750.19 last week. It has now gained almost 28 percent this year. The MSCI emerging equities index was up 0.69 percent. Emerging markets were shaken by a failed Latvian government debt sale and fears that it will be forced to devaluate its currency. The MSCI core index for Turkey has now fallen 4.98% so far this month, but is still up 38.18% over the last three months.

The bond market seemed to be focused on the lack of progress on the IMF front. Prime Minister Tayyip Erdogan on Thursday said talks with the International Monetary Fund were continuing and unveiled new incentives, including slashing corporate taxes and covering non-wage labour costs, to fight record unemployment and stimulate economic activity. Newspapers said the package could cost 60 billion lira.

The measures come despite concerns that increased spending will harm Turkish debt dynamics and push inflation higher, especially since the government has yet to agree on a loan accord with the IMF a year after its last pact expired. Prime Minister Tayyip Erdogan said on Thursday his government would reject any move from the IMF that it saw as political meddling. Turkey and the international lender have been negotiating a new loan accord for more than a year.

The government announced on Thursday new incentives to fight record unemployment and boost the impoverished southeastern regions, including corporate tax rate cuts and hand-outs to large investments. The government did not announce how it would finance the package it announced yesterday and this is disturbing the market. Turkey raised its official budget deficit target fivefold for this year to 48.3 billion lira.

The IMF expects Turkey's economy to shrink 5.1 percent this year, after growing 5.9 percent on average in 2002-2008. Turkish Economy Minister Ali Babacan said last Monday the economy may shrink by more than a previously expected 3.6 percent this year as the world economy slows, but will return to "significant growth" in 2010.

Turkey's economy, which expanded by an average of more than 7 percent between 2002 and 2007, may have contracted by as much as 10 percent in the first quarter of this year, as the global recession sapped foreign demand for Turkish goods and led to record unemployment.

Turkey suspended special consumption taxes for three months on cars, white goods, electronics and large houses on March 15. Automotive companies have repeatedly urged the government to extend the breaks to encourage domestic consumption after their exports plunged in the global recession.

Turkey's year-long negotiations with the international lender have failed to produce an agreement, and Prime Minister Tayyip Erdogan has said Turkey would not concede on certain points, like spending, and can do without the funding if necessary.

Babacan said that the government's budget would produce a deficit before interest payments for the first time in years, amid rising government spending and declining tax revenue. Investors and economists say an IMF deal, which could be worth as much as $45 billion, would help the government and private-sector roll over debt payments coming due later this year after international credit markets dried up.

Industrial production, which has fallen for nine consecutive months, picked up last month, Babacan also said. Government data on Monday showed output fell 18.5 percent in April, more than expected.

The current account deficit will fall to less than $10 billion this year from $41.42 billion in 2008, Babacan also said, as the slowing domestic economy saps demand.

Turkey has been locked in fruitless negotiations with the IMF since its last loan deal expired last year's May, with both sides at odds over levels of government spending.

Turkey's economy shrank 6.2 percent in 2008's last quarter, and economists expect a double-digit contraction in the first quarter. Quarterly GDP data will be announced on June 30.

Unemployment has risen to a record high of 16.1 percent.

Erdogan, who said those aspects of the package related to labour would cost just under 1 billion Turkish lira ($648.1 million), said this week he believes the economy will return to positive growth as early as this summer, but the IMF is more pessimistic and expects GDP to decline 5.1 percent this year. Unlike many Western countries Turkey did not resort to sweeping stimulus packages early this year as it hoped the Turkish private sector's dynamism and the relative absence of household debt would help it emerge from the crisis earlier.

Calls from European and American analysts for Turkey to sign a deal with the International Monetary Fund are strengthened by similar advise from Yoshihiko Tamura, a Japanese analyst at the Japan Credit Agency. Turkey needs foreign funding to close its widening budget gap, he says. Yoshihiko Tamura, an analyst for Turkey at the Japan Credit Agency, or JCR, said an agreement with the International Monetary Fund, or IMF, is "a must" for the economy.

Speaking to the Anatolia news agency, Tamura said Turkey should sign a standby deal with the IMF that would solidify global confidence in the economy. In order to come out of the crisis period with minimal damage and realize sustainable economic growth, Turkey should also continue on the path to European Union membership by passing reforms, the analyst said. Noting that the economic situation is "sluggish" in Turkey, Tamura added, "It is not a negative approach to change Turkey’s current credit note in the current crisis."

"Thanks to its strong finance sector, Turkey is able to survive the first effects of the crisis," he said. As negative conditions in the economy cause foreign and domestic demand to decline along with investments, Turkey will contract considerably, Tamura said, adding, "Turkey can see a return to growth next year."

Under current conditions, Turkey should find foreign sourcing to close its foreign-financing deficit, the analyst said. However, foreign financing sources have diminished due to the crisis. As oil prices start to rise again and exports see considerable contraction, the budget deficit will become a problem again, Tamura said. Crude oil futures for July delivery traded at $68.44 a barrel on the New York Mercantile Exchange on Friday.

"Signing the IMF deal is the best thing to do as Turkey is in need of increasing foreign financing sources," Tamura said. "A standby would not only support the country’s finances, but also increase international confidence."

Turkey could get through the global economic recession without an International Monetary Fund program, but it is a "risk," the head of emerging Europe sovereigns at Fitch Ratings said Wednesday.

Speaking at Fitch's emerging Europe conference, Edward Parker said given the circumstances, it would be "prudent" for Turkey to secure IMF funding.

Fitch currently rates Turkey BB- with a stable outlook.

Turkey has been in stop-and-go negotiations with the IMF all year. But while the global slowdown has taken a heavy toll on Turkey's domestic economy, it has also led to a sharp cut in imports that has dramatically cut Turkeys' current account deficit and hence reduced its reliance on external funds.

Turkish bonds fell for a fifth day Friday, posting the biggest weekly loss since October, on concerns that Prime Minister Recep Tayyip Erdoğan’s stimulus plan would fuel borrowing and push the country further away from an agreement with the IMF. The drop in Turkish Lira-denominated debt raised the average yield 16 basis points to 12.91 percent Friday evening in Istanbul, extending the increase to 4.2 percent this week, the most since Oct. 24, an index of securities tracked by ABN Amro Holding showed.

Turkey's economy will likely shrink by 4.6-5 percent this year, government sources said on Tuesday, citing an expected cut in the official forecast for its contraction from the current 3.6 percent. Turkey's economy posted growth rates averaging 5.9 percent in 2002-2008 but the global crisis has sapped demand for its key textiles, automotive and electronics products this year.

The International Monetary Fund, which has been in talks with Ankara on a major loan deal, expects Turkey's economy to shrink 5.1 percent in 2009. "This year's contraction is seen in a range of 4.6-5 percent according to existing data but if oil prices rise, this will of course have an impact," said one senior government source.

Another source confirmed the government was likely to revise the forecast to -4.6-5.0 percent and said the figure would be higher if oil prices continued to rise. Turkey is a net oil importer. Turkey's economy contracted 6.2 percent in the final quarter of 2008, showing its worst performance since 2001's domestic financial crisis.
Analysts expect Turkish GDP to fall in double digits of percent year-on-year in the first quarter. The Turkish Statistics Institute will announce first quarter GDP data on June 30.

Deputy prime minister in charge of the economy Ali Babacan said this week that the economy may shrink by more than a previously expected 3.6 percent this year as the world economy slows, but would return to "significant growth" in 2010.

Economists welcomed the range of 4.6-5 percent as a more realistic GDP estimate, but said the government should also revise 2009 budget forecasts.
The official budget deficit estimate for 2009 is 48.3 billion lira ($31.2 billion).
"Revising the growth estimate is not enough. (Lower growth) means an even higher budget deficit. That means a larger budget deficit should be expected," AK Investment chief economist Hakan Aklar said. Turkey's budget deficit soared 268 percent year-on-year in the first four months of the year, endangering end-year targets. A rising budget deficit means higher borrowing from the domestic credit market and rising risk premiums for Turkish debt.

Building Permits Down In Turkey In Q2 2008

2008-09-07T14:48:00.000+02:00

According to Turkstat, during the first six months of 2008 compared to the first six months of 2007, and based on Construction Permits given by municipalities, the floor area, the number of buildings, and the number of dwelling units decreased by 12,6 %, 13,6%, and 10,5% respectively while the value of buildings erected increased by 3,1 %.

In the first six months of 2008 compared to the first six months of the previous year, considering the Construction Permits, the number of residential buildings fell down from 47 053 to 39 851, decreasing by 15,3 %. During the same period, the floor area of residential buildings fell from 43 871 844 m2 to 37 477 625 m2, a decrease of 14,6 %.

Obviously we can expect no GDP "uplift" from construction in the immediate future.

Inflation Eases Back Slightly In Turkey In August

2008-09-03T22:25:00.000+02:00

Both Turkish producer and consumer price inflation eased back slightly in August. The Turkish consumer price index fell 0.24 percent from July, while the producer price index was also down 2.34 percent on the month, according to data from the Turkish Statistical Institute (TURKSTAT) today. On an annual basis the Turkish CPI was running at 11.77 percent, while the PPI annual rate dropped to 14.67 percent.

The fall in the consumer price index was mainly due to reduced clothing and footwear prices, which were down 6.5 percent, as the summer sale session continues, as well as a fall of 1.55 percent in transport prices. Housing prices, on the other hand, increased by 2.12 percent in August.

The significant decrease in the monthly producer price index was mainly due to a 3.14 percent fall in prices in the manufacturing industry sector, in combination with a 2.41 percent fall in the industry sector and 1.99 percent fall in the agriculture sector.

Despite the fact that energy prices rose 5.69 percent this increase failed to push up the producer prices index. The Turkish Central Bank expects the 2008 year-end inflation rate to reach 10.6 percent, while the bank also estimates it will be somewhere in the rather large range between 5.9 and 9.3 percent in 2009, before dropping to a level of between 4 and 7.8 percent towards the end of 2010. These longer term predictions seem to me to be virtually worthless at this point, since we simply do not know what will happen to energy and food prices in 2009. The former depends to some considerable extent on the pace of output growth across the emerging economies, while the second depends to some significant extent on the weather, over neither of which factors the Turkish bank has any significant control.

Turkeys Trade Deficit Widens In July

2008-08-31T23:29:00.000+02:00

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

2008-08-19T20:32:00.000+02:00

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

2008-08-18T14:35:00.000+02:00

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

2008-08-16T19:41:00.000+02:00

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

2008-08-12T12:32:00.000+02:00

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.

Turkey Central Bank Raises Inflation Target

2008-06-04T21:20:00.001+02:00

Turkey revised next year's inflation target to 7.5 percent from 4 percent after an increase in energy and food costs pushed the inflation rate into double digits. The government also agreed with the central bank to set the inflation goal for 2010 at 6.5 percent and the target for 2011 at 5.5 percent according to Economy Minister Mehmet Simsek.

The Turkish lira and stocks fell, and bond yields rose following the central bank decision. Turkey's lira fell 0.81 percent against dollar to close at 1.24. The Istanbul stock exchange shed 1.53 percent of its value. Yields on lira-denominated bonds rose as much as 26 basis points to a 14-month high of 20.28 percent in Istanbul.

The central bank has struggled to bring the inflation rate down toward 4 percent because of record oil and food prices. Faster inflation prompted the bank to raise its benchmark interest rate by a half point to 15.75 percent last month, the first increase in almost two years.

The government is committed to supporting the central bank in its inflation fight by paying down debt and preserving financial discipline, Simsek said. It is also ready to take ``precautionary measures'' in the banking industry to ensure lower inflation rates, he said without elaborating.

Since coming to power in 2002, the governing Justice and Development Party has reduced the country's debt stock and budget deficit to levels that meet the European Union's Maastricht criteria for adopting the euro. Its policies have also helped attract record levels of foreign investment and cut the inflation rate to a low of 6.9 percent last July from more than 30 percent.

Turkey's inflation rate rose to a 14-month high of 10.7 percent in May from 9.7 percent a month earlier, the government's statistics agency said yesterday. The price of unleaded fuel rose 7 percent from April and food prices jumped 16 percent.

Higher inflation means the bank will maintain its ``tight stance'' on interest rates, governor Durmus Yilmaz said in a letter to the government published late yesterday.

``Food and energy prices continue to pose risks to the medium-term inflation outlook and there is no clear evidence that this trend will reverse in the short term,'' Yilmaz said.

The bank will adopt policies aimed at beating the new inflation targets and not just meeting them, he added. Food and energy prices added seven percentage points to May inflation, the central bank said in a report published today. The inflation rate will probably remain high in the ``coming months'' due to the base effect from a year ago, the bank said. Inflation should start to slow in the fourth quarter, it added.

The central bank's monetary policy committee will meet on June 17 to decide whether to revise the benchmark interest rate.

Turkey Inflation May 2008

2008-06-03T21:27:00.000+02:00

Turkish inflation was back in double digits last month, and for the first time in more than a year, adding to expectations of an early rate hike.

The Turkish Statistics Institute (Turkstat) said the consumer price index rose 1.49 percent month on month to an annual rate of 10,74%. The producer price index rose 2.12 percent month-on-month, with an annual rise of 16.53 percent.

Core inflation was also well above the central bank's year-end target of 4 percent.

The central bank raised its benchmark interest rate last month to 15.75 percent, reversing an easing cycle to hike for the first time since 2006, and has signalled it could tighten further.

As elsewhere, Turkey is suffering from the effects of food and oil price rises and the central bank has said it will take measures to prevent second-round effects.
But other factors also pushed the index higher in May.

Prices of clothing and shoes rose 11.99 percent month-on-month, while restaurant and hotel prices rose a higher-than-average 1.66 percent in the month. Stripping out energy, food, drinks, tobacco and gold, the CPI rose 6.30 percent year-on-year in May, Turkstat said.

Headline May inflation was also above a year-end forecast of 9.3 percent given by the central bank as recently as April. The bank forecasts inflation will end next year at 4.9-8.5 percent.

Inflation expectations have also continued to deteriorate, according to the central bank's twice-monthly surveys of economists and business leaders. In its latest poll, consumer price inflation was seen ending the year at 9.64 percent, and at 7.88 percent in 12 months' time.

Adding to inflation concerns, the lira has weakened as much as 14 percent this year, although high interest rates have helped it trim its losses back to 4.5 percent. The lira was broadly flat after the inflation data release.

Turkey Employment and Unemployment February 2008

2008-05-17T21:46:00.000+02:00

Working age population increased by 737 thousand in the period of February 2008 compared to the same period of the previous year

While non-institutional civilian population increased by 764 thousand persons and has reached to 69 million 372 thousand persons, non-institutional working age civilian population has increased by 737 thousand and has reached to 49 million 672 thousand persons in the period of February 2008.

Non-agricultural employment increased by 355 thousand

Number of employed persons increased by 104 thousand persons compared to the same period of the previous year and has reached to 20 million 162 thousand persons in the period of February 2008. Agricultural employment decreased by 252 thousand persons and non-agricultural employment increased by 355 thousand persons in this period.

Of those who were employed in February 2008; 23.6 % was employed in agriculture, 21.3 % was employed in industry, 5.1 % was employed in construction and 50.1 % was employed in services. Employment in agriculture decreased by 1.3 while that industry increased by 1 percentage points, construction increased by 0.4. The share of services was realized without any change.

Number of unemployed persons increased by 55 thousand persons compared to the same period of the previous year and has reached to 2 million 642 thousand persons in Turkey. Unemployment rate realized as 11.6 % with 0.2 points increase. Unemployment rate increased to 13.4 % with a 0.4 percentage points increase in urban areas and reached to 8.5 % with 0.3 percentage points decrease in rural areas.

Non-agricultural unemployment rate realized as 14.2 % without any change compared to the same period of the previous year in Turkey. The rate is realized as 13.4 % with a 0.1 percentage points increase for male and 17.5 % for female with a 0.2 percentage points decrease. In this period, of those who were unemployed.

Turkey Consumer Confidence April 2008

2008-05-17T20:24:00.000+02:00

Turkey's consumer confidence index fell 6.99 percent month-on-month in April to a data series low of 76.24 points, the Turkish Statistics Institute said on Friday.
In March the index had fallen 6.44 percent month-on-month to 81.96 points, after falls in January and February.

The index, which was launched in December 2003, assesses consumers' spending behaviour and expectations, and the 100-point mark divides pessimism from optimism.

The index has only once fallen more sharply month-on-month - in June 2006 when it dropped 7.9 percent during a period of financial turbulence in Turkey, when the central bank was forced to raise interest rates sharply. With a background of rising inflation, the central bank hiked rates on Thursday for the first time since 2006.

Consumer confidence readings are going from bad to worse, as economic pressures continue to mount. There has evidently been a substantial decline in perceptions of the general economic situation.

Turkey's economic growth - which had been averaging 6.8 percent a year since a crisis in 2001 - has slowed down in the last year or so and full-year 2007 growth of 4.5 percent fell short of a 5.0 percent government target.

The government has lowered its 2008 gross domestic product growth forecast to 4.5 percent from an initial target of 5.5 percent, although the International Monetary Fund expects growth to come in at a lower 4.0 percent.

The statistics institute said the fall in the confidence index was related to a deterioration in consumers' expectations on purchasing power, the economic outlook and job opportunities in the coming period.

Turkish Central Bank Raises Base Rate in May

2008-05-17T16:34:00.000+02:00

Turkey's central bank raised its benchmark interest rate by a half point this week, paring six cuts in the past nine months after the inflation rate reached a 12-month high and the government said it would loosen spending limits. The Ankara-based Turkiye Cumhuriyet Merkez Bankasi increased the overnight borrowing rate for the first time in almost two years to 15.75 percent, higher than any other rate in Europe.

The bank was forced to reverse its policy of cutting rates after rising global oil and food prices helped push inflation in April to 9.7 percent. Turkey will miss its inflation target, currently at 4 percent, for a third consecutive year, central bank Governor Durmus Yilmaz said on April 30.

The secondary impact of a weakening in the lira and rising global energy and food prices would create a ``temporary'' increase in the inflation rate, the bank said in a press release after the decision. The bank would take further ``measured'' interest rate increases if necessary.

The Committee expects inflation to start decelerating in the last quarter of the year, ending 2009 at around 6.7 percent, as forecasted in the April Inflation Report. In the forthcoming period, monetary policy decisions will be geared towards keeping inflation close to these forecasts. Therefore, it is important that economic agents align their expectations with the Central Bank forecasts. The Central Bank will continue to take the necessary measures to prevent the potential second-round effects of the adverse developments in food and energy prices.

Accordingly, the Committee will consider the possibility of a further measured rate hike in the next meeting. The extent and timing of possible future rate hike will depend on developments in global markets, external demand, fiscal policy implementation, and other factors affecting the medium term inflation outlook.

On May 3, three days after Yilmaz said the bank was poised to increase rates, the government announced it was loosening its budget targets to step up spending on infrastructure and job creation. A $10 billion International Monetary Fund lending accord designed to slow inflation by curbing spending expired on May 10.

The government is raising spending after the economy expanded 3.4 percent in the fourth quarter of 2007, the same pace as the previous three months and the slowest in almost six years.

If the bank wants to offset inflation by nudging the lira back up then it seems to be having some of the desired effect since the lira posted its biggest weekly gain versus the dollar since September last week. The lira rose to the highest level in two months against the dollar, rising 1 percent on Friday to 1.2315 by 6:40 p.m. in Istanbul, its strongest level since March 19. It advanced 2.8 percent over the week, in the process paring its deline of 5 percent so far this year.

Extract From the Central Bank April Inflation Report

Inflation Developments

Food, energy and other commodity prices continued to have adverse
effects on inflation in the first quarter of 2008. Oil prices continued to rise and
averaged around 100 USD per barrel. Annual food price inflation remained at
elevated levels, reaching 13.4 percent in March. Moreover, rising financial
volatility and declining risk appetite on the back of ongoing global uncertainties
have led to exchange rate movements which had first round effects on March
inflation. Consequently, inflation rose to 9,15 percent at the end of the first
quarter, breaching the upper limit of the uncertainty band.

As a consequence 6.13 percentage points of the 9.15 percent annual CPI
inflation in March resulted from the food and energy items. Annual inflation in
core goods and services remained flat over the previous quarter, confirming
that the rise in inflation can be mostly attributed to factors beyond the control
of the monetary policy. Annual inflation in CPI excluding food,
energy and tobacco items was at 4.8 percent at the end of the first quarter.

Turkey Industrial Output March 2008

2008-05-12T21:14:00.000+02:00

The Turkish monthly Industrial Production Index reached 150.4 in March increasing, 2,4 % in March of 2008.

In the sub sectors level of industry, mining sector increased 12.4 %, manufacturing industry was up 1.9 %, electricity, gas and water increased by 3.8 % in March of 2008compared with same month of the previous year.

When the three-month average of 2008 is also compared to previous year, total industry sector increased 6.8 %, mining sector increased 10.9 %, manufacturing industry sector increased 6.3 %, electricity, gas and water sector increased 9.8 %.

The highest rates of increase were in the manufacture of motor vehicles, trailers and semi-trailers (26.0%), manufacture of electrical machinery (14.3%), wood and of products of wood and cork (12.6%).

Turkey, the IMF and Infrasturcture In the Kurdish East

2008-05-12T09:50:00.000+02:00

The $10bn loan agreement between Turkey and the International Monetary Fund which expired earlier this month removed what many have seen as an anchor for Ankara’s economic and structural reform programme just at the moment when Turkey's economy is passing through a tricky moment, and by all apearances heading into a slowdown. The expiry of the agreement, originally designed to help Turkey out of a crippling financial crisis seven years ago, brings to an end one of the most intense and, in many respects, most successful of the fund’s current operations. Turkey got its first loan from the IMF in 1961.

Investors viewed the agreement, along with the prospect of European Union membership, as the two main anchors of the government’s reform agenda. The fact that the agreement is not being immediately replaced in the context of what is evidently a deteriorating global environment, worries many analysts who have become concerned that both the reform agenda and EU membership prospects may be faltering.

The $10bn agreement was obviously valuable for both parties since it achieved some notable successes, and has allowed the IMF to present Turkey as one of its more positive policy stories over the past five years. Lorenzo Giorgianni, head of the IMF’s Turkey monitoring team, said recently that the country had over-achieved in some key respects, given that some targets – such as GDP growth, public finances, debt ratios and reserves – were all above the initial targets.

However since the ending of the agreement fears have been voiced that the Turkish government may be loosening fiscal policy, and as evidence of this they point to this week's announcement by the government of the details of a $12bn additional investment package. However, before reaching any hasty decisions here we would do well to think about this package in more detail, about the value it may have at the present time in macro demand management terms, and in particular about its infrastructural focus and the fact that it is directed towards the Kurdish dominated provinces in the south-east, and thus as well as the immediate economic objectives the initiative could be seen as taking one tentative step in the direction of countering separatist sentiment and improving living standards in what is one of Europe’s most impoverished regions.

Recep Tayyip Erdogan, the Turkish prime minister, has said that as well as the infrastructural components the package will also include funding for cultural, educational and landmine-clearance initiatives. The entire investment is expected to create up to 3.8m jobs and free up for farming some 1.8m hectares of land.

Erdogan said TL1bn ($802m, €509m, £405m) of new funding would be added to the roughly TL15bn earmarked for spending in the region in April, when the government reduced some fiscal targets agreed with the International Monetary Fund in order to boost public spending between now and 2012. Mehmet Simsek, Turkey’s economy minister and also the person responsible for liaison with the IMF has indicated that the government wants to continue a close relationship with the fund, but it is seeking greater flexibility to raise public spending to address the huge backlog in infrastructure spending. Equally, at a time when private domestic demand is being held so tightly in check by the high interest rates being (sensibly) maintained by the central bank increasing public demand on worthwhile projects might seem like a reasonable policy option to maintain some growth momentum.

Mr Erdogan, speaking in Diyarbakir, Turkey’s main Kurdish city, described the package as “a well defined, scheduled, and funded action plan to remove regional differences in economic and social development, unemployment, and migration”. He said it would “constitute a social restoration to strengthen our social fabric, unity, and integrity”.

Most of the money is to be spent on irrigation and hydroelectric schemes under the banner of the South Anatolia Project. This vast state project, initiated in the 1970s, aims to harness the region’s rivers, including the Tigris and Euphrates, and to boost farm production and electricity generation. Given that one of the problems facing Turkey at the present time has been the high price of food products and energy, so anything which is realistic in policy terms and can help improve the situation in the longer term can only be welcomed I feel.

Turkey Foreign Trade March 2008

2008-05-05T15:43:00.000+02:00

Turkish exports increased by 42.9% between January-March when compared with the same period of the last year. According to the provisional data from Turkstat, in March 2008 exports were up by 27.6% year on year and totalled 11,429 Million Dollars, while imports were up by 26.9% and totalled 16,792 Million Dollars.

Over the same period, the foreign trade deficit was up by 25.4%, and reached 5,363 Million Dollars. In March 2008 exports coverage of imports was 68.1% while it was 67.7% in March 2007.

51.1% of Turkey's exports went to the European Union. In the January-March period exports to the EU totalled 16,937 Million Dollars and increased by 26.6% over 2007.

In January-March 2008, Turkey's main export partner was Germany with 3,402 Million Dollars an increase of 25.1%. In March 2008, exports to Germany was 1,166 Million Dollars and increased by 12.9% in comparison with the same period of the previous year. For exports, Germany was followed by Italy (705 Million Dollars), the UK (677 Million Dollars), France (598 Million Dollars), Russia (598 Million Dollars) and UAE (510 Million Dollars).

In January-March 2008, while the European Union Countries were the most intensive country group for imports (18,996 Million Dollars), followed by other European Countries (10,598 Million Dollars), Asian Countries (13,517 Million Dollars) and Free Zones in Turkey (357 Million Dollars).

In March 2008, the top country for Turkey’s imports was Russia (2,483 Million Dollars), records for imports range from Germany (1,633 Million Dollars), China (1,308 Million Dollars), Italy (974 Million Dollars) and the USA (864 Million Dollars).

For January-March 2008, road vehicles and their parts had by far the highest value of goods exported at 5,259 Million Dollars and then, iron and steel 2,742 Million Dollars, machineries, mechanical appliances, boilers, equipments and parts 2,531 Million Dollars, gold, pearl and other precious stone and products, coins 2,523 Million Dollars, articles of apparel and clothing accessories 2,132 Million Dollars.

At the same period, the top categories for imports were mineral fuels and mineral oils (10,932 Million Dollars) and then machineries, mechanical appliances, boilers, equipments and parts (5,858 Million Dollars) and iron and steel (5,357 Million Dollars).

New Turkey Deal With IMF In the Offing

2008-05-05T09:18:00.000+02:00

The Turkish government outlined a multi-billion dollar public spending programme late last week, with the explicit intention of losening fiscal policy ahead of a new, and probably much less stringent, agreement with the International Monetary Fund. All current evidence suggests the Turkish government will seek a looser arrangement with the IMF when the agreement ends next Saturday. Turkey is expected to sign a “precautionary stand-by arrangement” that will allow for some fund oversight of fiscal policy but will not include guaranteed funding. Indications from the IMF suggest that they are not unsympathetic to the Turkish viewpoint.

The finance ministry said it was revising some key budget targets between 2008 and 2012 to release about 17bn new Turkish lira (YTL) ($13.4bn, €8.7bn, £6.8bn) for investment in infrastructure. The announcement is a sign that the government, pressured on the one side by strict IMF oversight and on the other by a serious political crisis, intends to pursue an ambitious public spending programme, much of it concentrated in Turkey’s unsettled south-eastern region.

The government’s ability to spend on infrastructure has been curtailed since 2002 by a $10bn (€6.5bn, £5bn) loan agreement with the IMF that set strict targets for public finances. The most visible of these was a primary surplus – the budget surplus before interest payments – that was once as high as 6.5 per cent of gross domestic product.

Kemal Unakitan, the finance minister, said the government was revising the primary surplus target down to 3.5 per cent for 2008 and to 2.4 per cent in 2012, after an upward revision of the size of the economy this year.

This year's budget aimed for a so-called primary surplus, excluding interest payments, equal to 5.5 percent of estimated economic output. Since then, the government's statistics office has revised its GDP forecast, increasing it by about a third and effectively reducing the budget target to about 4.2 percent. The primary surplus goal will be 3 percent next year, 2.7 percent in 2010, 2.5 percent the following year, and 2.4 percent in 2012.

The government aims to spend as much as 17 billion liras ($13.5 billion) over the next five years on the Southeast Anatolia Project, a $32-billion chain of hydro-electric dams and irrigation systems in the mainly Kurdish southeast, according to Economy Minister Mehmet Simsek. The project could ``double or triple'' farm output in area, he said.

The shift to increased public spending is unlikely in principle to worry the financial markets, given the underlying soundeness of Turkey’s YTL 750bn economy. What might concern investors, however, is that it coincides with an economic slowdown and heightened political tensions. There are indications that the central bank may well raise interest rates later this month to curb inflation, currently running at 9.7 per cent. Of course another reading which could be put on any decision to raise rates is that higher interest rates serve to underwrite the lira at a time of global uncertainty. If the bank fails to raise rates then this can be seen as a weakening in the will to fight inflation and the bank could lose credibility. But Turkey's economy has slowed considerably, inflationary pressure is more a by-product of global prices than of excess domestic demand, and arguably some parts of the economy need a boost. Hence the decision to loosen fiscal policy even as monetary policy is tightened.

The five-year investment programme includes funds to boost agricultural production in an attempt to keep food prices from rising excessively. However as we are seeing in one country after another, rising domestic food prices at a time when global prices are pushed up and up is one of the inevitable downsides of economic openness.

Turkey Inflation April 2008

2008-05-03T17:18:00.000+02:00

The Consumer Price Index was up on the previous month by 1,68%, on December of the previous year by 4,82%, on same month of the previous year by 9,66% and on the twelve months moving averages basis by 8,33% in April 2008.

The highest monthly increase was 11,69% in the index for clothing and footwear by main expenditure groups. The indices rose for transportation 2,38%, for hotels, cafes and restaurants 1,74%, for food and non-alcoholic beverages 1,01%, for miscellaneous goods and services 0,79%, for housing 0,72%, for furnishings and household equipment 0,52%, for education 0,12%, for health 0,06%, for communication 0,04%, for alcoholic beverages and tobacco 0,03%, while the index declined for recreation and culture -0,13%.

The highest annual increase was in the index for housing.

The highest increase was 15,22% in the index for housing compared with the same month of the previous year. Food and non-alcoholic beverages (13,48%), hotels, cafes and restaurants (12,77%), miscellaneous goods and services (9,84%) were the other indices where high increases were realised.

The highest monthly increase was 2,99% in TRB2 (Van, Muş, Bitlis, Hakkari) among 26 regions (NUTS2).

The highest monthly increase in CPI by regional basis was in TRB2 (Van, Muş, Bitlis, Hakkari) (2,99%). The high increases in CPI were recorded in TRB2 (Van, Muş, Bitlis, Hakkari) region (6,72%) compared with December of the previous year, in TRB2 (Van, Muş, Bitlis, Hakkari) region (12,49%) compared with the same month of the previous year and in TRA2 (Ağrı, Kars, Iğdır, Ardahan) (9,69%) on the twelve months moving averages basis.

Prices of 299 items increased in total of 454 items covered in the index.

In April 2008 within average prices of 454 items in the index, average prices of 73 items remained unchanged while average prices of 299 items increased and average prices of 82 items decreased.

Turkey Producer Prices April 2008

2008-05-03T17:00:00.000+02:00

Turkey's producer price index rose by 4.50% over the April 2008 level. The index was up on December 2007 by 11.04%, on March 2007. The current twelve month average is now 6.39%.

Monthly oncreases were 2.87% in the index for agriculture and 4.90% the index of industry.

Th agriculture PPI increased 7.53% compared with December 2007, 18.83% compared with April 2007 and 11.98% on a twelve month average basis. The PPI for industry increased 11.91% compared with December 2007, 13.59% compared with April 2007 and 5,13% on a twelve month average basis.

The highest monthly increase in the PPI of industrial activities was recorded 19.40% in the index for metallic minerals.

There were increases 4.69% in the index for mining and stone quarrying, 4.92% in the index for manufacturing industry and 4.66% in the index for electricity, gas and water by sub-sections of industry.

The high rates of monthly increase in PPI by sub divisions were in the industrial price indices for metallic minerals (19.40%), for coke and refined petroleum (11.63%), for basic metal industry (11.62%), for crude petroleum and natural gas production (10.12%), for machinery and equipment (8.06%).

On the other hand index declined for tobacco products (-0,01%) compared with the previous month.

The high rates of annual increase were in the industrial price indices for metallic minerals (53,00%), for coke and refined petroleum (47,81%), for crude petroleum and natural gas production (47,75%), for basic metal industry (27,94%), for food products and beverages (18,96%).

Prices of 464 items increased in total of 756 items covered in the index.

In April 2008 within average prices of 756 items in the index, average prices of 189 items remained unchanged while average prices of 464 items increased and average prices of 103 items decreased.

Turkey's Central Bank Maintains Its Inflation Forecast Despite Accepting It Isn't Valid

2008-05-01T11:43:00.000+02:00

Turkey’s central bank said on Wednesday that inflation in 2008 would be nearly double its official target in the face of rising energy and food prices, and warned of higher interest rates. Durmus Yilmaz, central bank governor, said inflation for this year would probably come in at 9.3 per cent, compared with a target range of 4.1-6.9 per cent it set in December. He said the bank, which adopted official inflation-targeting as the basis of its monetary policy in 2006, would probably not meet its long range 4 per cent target for another two years.

Mr Yilmaz blamed the deteriorating inflation outlook on rising energy and food prices. He said the soaring cost of oil and gas could add five percentage points to inflation next year. Rising food prices are also beginning to worry the government, which announced earlier this month that it would abolish import duties on rice

The bank has already missed its inflation target for 2006 and 2007. In an interview with the Financial Times earlier this year, the governor admitted missing the target for two successive years was “a huge credibility problem for the central bank”.

He argued at a news conference on Wednesday that there would have been no point in changing the official target in mid-year.

Turkey Consumer Confidence Index March 2008

2008-04-17T15:47:00.000+02:00

Turkey's Consumer Confidence Index declined by 6.44 points in March, compared to the previous month, according to the Ankara-based Turkish Statistics Institute (Turkstat). This decline seems to confirms consumers' uneasiness over the current economic outlook. The monthly Consumer Tendency Survey, carried out with the cooperation of the TÜİK and the Central Bank, evaluates consumer behaviour and expectations for general outlook, job opportunities, personal financial standing and market developments. The index indicates an optimistic outlook when it is above 100, and a pessimistic one when it is below 100. Basically we are now at very low levels.

The index, which was 87.60 in February, declined to 81.96 in March, according to Turkstat data. The decrease derived from the deterioration in consumers' assessments concerning their purchasing power at present and in the next period, the general economic situation and job opportunities in the next period.

In terms of the sub-indices and percentage change, purchasing power index for the current period declined from 77.68 to 74.47 while purchasing power for the next period was down from 84.37 to 79.36 in March. The index of economic situation and job opportunities for the next period deteriorated from 81.83 to 74.93 and from 81.99 to 77.47 respectively last month, compared to February. Over the period, the index that indicates the appropriateness of the current period for purchase of durable goods fell from 112.14 to 103.58

Turkey Economic Growth Q4 2007

2008-03-31T22:19:00.000+02:00

Turkey's economic growth remained weak in the fourth quarter of 2007 and was unchanged at a five-year low of 3.4 percent due to weak consumer spending and a poor harvest the statistics office (Turkstat) said today, since third-quarter growth was also revised to 3.4 percent. Consumer spending has slowed steadily since the central bank raised interest rates in mid-2006 amid a financial crisis and in order to combat inflation. Low rainfall has also hit farm output.

Agricultural output fell 9.7 percent in the quarter, while construction expanded 0.5 percent, compared with growth of 4 percent the previous quarter and 18.5 percent in 2006, when the economy as a whole grew 6.9 percent. Industrial production increased at an average rate of 5.2 percent in the fourth quarter.

Gross domestic product in 2007 was $659 billion, the agency said. Growth for the year was 4.5 percent. The government's target was 5 percent.

A court case to outlaw the ruling Justice and Development Party which is rumbling around in the background may also lead to political instability, further damping the economic expansion.

Consumer confidence has also taken a hit, and the index of consumer confidence fell from a previous high of 96.2 to 93.9 during the fourth quarter and in February hit 87.6, the lowest since records began in 2003.

Private consumption increased an annual 2.9 percent in the quarter, slowing from 8.2 percent three months earlier.

The central bank cut its benchmark overnight borrowing rate by a total of 2.25 percentage points to 15.25 percent between September and February before halting its reductions this month. Any pick-up in domestic demand will be limited by the impact of the global credit squeeze, central bank Governor Durmus Yilmaz said on March 13.

Turkey Consumer Confidence February 2008

2008-03-18T22:09:00.000+01:00

The Turkish consumer confidence index fell by 4.9 percent in February according to the latest monthly Consumer Tendency Survey carried out by the Turkish Statistics Institute (TurkStat) and the Turkish Central Bank, which was released yesterday.

The survey shows that consumer confidence declined from 92.12 in January to 87.6 in February. The index indicates an optimistic outlook if it is above 100 and a neutral outlook if it is equal to 100. When it is below 100 points, it means consumers are pessimistic about their future.

The decrease in the Consumer Confidence Index stemmed from a deterioration in consumers' assessments concerning their purchasing power for the present and coming periods, the general situation of the economy, job opportunities in the next six months and the "buying time conditions" of durable goods in the present period.

The index value of consumer purchasing power was 82.66 in December 2007 but retreated to 80.78 and 77.68 in the first two months of the year, respectively. Consumers are not anticipating an increase in their purchasing power in the coming six months, either, as they are expecting it to decrease by a further 2.63 percent.

The index for "buying time conditions" was also down in the survey, from 118.41 in January to 112.14 in February. Under this subtitle, the changes in the index values were as follows: probability of buying durable goods in the next six months (0.48 percent); probability of buying a car in the next six months (7.47 percent); probability of buying or building a home within the next 12 months (1.57 percent); probability of spending money on home improvements or renovations in the next six months (22.68 percent); probability of borrowing money to finance consumption expenditures in the next three months (-2.74 percent); "saving time conditions in the present time" (2.11 percent); probability of saving in the next six months (7.95 percent); expectation about the direction of price changes in the next 12 months (-5.38 percent).

Turkey Unemployment December 2007

2008-03-18T22:06:00.000+01:00

Turkey's unemployment rate increased by 0.1 percentage points in December 2007 over the same period last year, rising to 10.6 percent, while the non-agricultural unemployment rate was 13 percent, according to the latest data released by the Turkish Statistical Office, Turkstat.

The latest Household Labor Survey by the Turkish Statistics Institute (TurkStat) has shown that the unemployment rate in urban areas increased to 12.2 percent in December 2007, up by 0.3 percentage points over the same month last year, whereas in rural areas it increased to 8.1 percent, a 0.6 percentage point increase over the same period last year.
The non-agricultural unemployment rate was down by 0.3 percentage points to 13 percent. TurkStat's figures showed that 74.9 percent of those who were unemployed in December 2007 were male. The figures indicated that 57.8 percent of the unemployed had a below-high-school education level, 27.4 percent had been seeking jobs for one year or more, 32.5 percent were seeking jobs through "their acquaintances." Furthermore, 83.7 percent of them, 2.04 million people, had worked previously and, among those who were employed previously, 46.2 percent were employed in services, 23.2 percent in industry, 19.7 percent were in construction and the remaining 10.9 percent were in agriculture.

According to the figures, the working age population increased by 763,000 in December 2007 compared to the same period of the previous year. While the non-institutional civilian population increased by 756,000 and has reached 69.25 million persons, the non-institutional working age civilian population increased by 763,000, a total of 49.58 million.

The number of employed people decreased by 315,000 compared to the same period the previous year, totaling 20.44 million. The figures also shoed that the agricultural employment decreased by 508,000 and the non-agricultural employment increased by 193,000 in December 2007.

Of those who were employed in December 2007, 24 percent were employed in agriculture, 21 percent in industry, 5.5 percent in construction and 49.5 percent in the services sector. Of the people who were employed in this period, 75.3 percent were male, 60.5 percent had a below-high-school education level and 59.9 percent were regular or part-time employees, whereas 27.8 percent were self-employed or employers, and the remaining 12.3 percent were unpaid family workers. Other facts about this group include: 59.4 percent worked in establishments consisting of 1 to 9 employees, 2.5 percent had an additional job, 3 percent were seeking jobs either to replace their current job or to augment their existing job and 90.2 percent of regular employees were working in permanent jobs.

For the survey, a total of 37,385 sample households, 26,391 of which were from urban areas and 10,994 of which were from rural areas, were used. Of these, 31,850 households were interviewed and non-response forms were filed for various reasons for 5,535 households. In December 2007, the non-response rate was 13.3 percent in rural areas, 13.8 percent in urban areas and 13.7 percent for overall Turkey.

Turkish Foreign Trade January 2008

2008-03-10T00:11:00.000+01:00

Turkish exports increased by 61.4% in January 2008 compared with January 2007...

According to the provisional data from Turkstat, in January 2008; exports grew by 61.4% and reached to 10,596 Million Dollars and imports grew by 53.9% and reached to 16,306 Million Dollars compared with January 2007. At the same month, foreign trade deficit increased by 41.8%, reached from 4,027 Million Dollars to 5,710 Million Dollars.

In January 2008 exports coverage imports was 65% while it was 62% in 2007.

Exports to EU were 5,460 Million Dollars...

The weight of the EU in Exports has continued in January 2008. As compared with the same month of the previous year, exports to EU were 5,460 Million Dollars increased by 44.3%. The proportion of the EU countries was 51.5% while the proportion of Free Zones was 2.5% and other countries was 45.9%.

In January 2008, the main partner country for exports was Germany with 1,070 Million Dollars and increased by 39%. For exports, Germany was followed by the Switzerland (745 Million Dollars), UK (733 Million Dollars), Italy (678 Million Dollars), France (586 Million Dollars), and Russia (420 Million Dollars).

In January 2008, while the European Union Countries were the most intensive country group for imports (5,989 Million Dollars), followed by other European Countries (3,708 Million Dollars), Asian Countries (4,589 Million Dollars) and Free Zones in Turkey (140 Million Dollars).

For January 2008, the top country for Turkey’s imports was Russia (2,618 Million Dollars), records for imports range from Germany (1,463 Million Dollars), China (1,336 Million Dollars), Italy (852 Million Dollars) and USA (738 Million Dollars).

Road vehicles are forefront in exports according to chapters...

For January 2008, road vehicles and their parts has by far the highest value exported at 1,633 Million Dollars and then, pearl and other precious stone and products,coins 1,078 Million Dollars, machineries, mechanical appliances, boilers, equipments and parts 742 Million Dollars, iron and steel 729 Million Dollars, articles of apparel and clothing accessories 714 Million Dollars.

At the same period, the top categories for imports were mineral fuels and mineral oils (3,764 Million Dollars) and then machineries, mechanical appliances, boilers, equipments and parts (1,870 Million Dollars), iron and steel (1,730 Million Dollars), electrical machinery and equipment (1,340 Million Dollars).

Turkey Consumer Price Inflation February 2008

2008-03-10T00:01:00.000+01:00

The Turkish Statistics Institute (TurkStat) has announced that year-on-year consumer price inflation as of the end of February was up`by 9.1 percent. The Turkish Central Bank's year-end inflation target was 4 percent for 2008, but Turkey has just seen a full half of this inflation rate in one single month.

The highest annual increase was 14.75 percent in the housing index over same month of the previous year. Alcoholic beverages and tobacco prices increased by 14.34 percent; food and non-alcoholic beverages by 12.93 percent; and hotel, cafe and restaurant prices jumped by 11.02 percent.

The highest monthly increase in February was in food and non-alcoholic beverage prices, at 5.05 percent. The consumer price indices rose for miscellaneous goods and services by 1.73 percent; for hotels, cafes and restaurants by 0.90 percent; for furnishings and household equipment by 0.86 percent; for transportation by 0.54 percent; for housing by 0.39 percent; for communications by 0.12 percent; for health by 0.07 percent; and for alcoholic beverages and tobacco by 0.02 percent.

The indices declined for education by 0.03 percent, while for clothing and footwear dropped by 6.93 percent due to discount sales and campaigns. The index remained the same for recreation and culture. The highest price increase was for cucumbers, by 62.69 percent in February, while the price of green peppers rose by 45.51 percent. Women's boots saw the largest decline, at 12.14 percent.

Turkey Producer Price Index February 2008

2008-03-09T23:48:00.000+01:00

Turkey's Producer Price Index continued to accelerate in February rising by 2.56%, over January and by 8.15% over February 2007.

Monthly changes were 2.06% in the index for agriculture and 2,69% in the index for industry.

The agriculture PPI increased by 3.68% compared with December 2007, by 15.58% compared with February 2007. The industry PPI increased by 2.83% compared with December 2007, and by 6.45% compared with February 2007.

The highest monthly increase in the PPI of industrial activities was 21.32% in the index for electricity and gas.

There were increases 1.64% in manufacturing industry and 18.12% for electricity, gas and water and a decrease of 0,08% in the index for mining and stone quarrying.

The highest rates of monthly increase in the PPI were in the industrial price indices for electricity and gas (21.32%), for basic metal industry (6.55%), for wearing apparel (3.55%), for textile products (2.37%), for coke and refined petroleum (2.35%).

Turkey Inflation January 2008

2008-02-05T22:51:00.000+01:00

The Turkish Statistics Institute (TurkStat) announced Turkey's inflation rates for January yesterday, and the numbers came in somewhat lower than analysts' expectations. Turkey's inflation rate in January was a 0.8 percent month on month with December in the consumer price index (CPI) and a 0.42 percent rise month on month in the producer price index (PPI). CPI inflation was 1.76 percent points higher last year in January while PPI inflation was 2.93 points higher. Year-on-year inflation as of the end of January was at 8.17 percent For the CPI and 6.44 percent in the PPI.

While it is impossible to say that inflation has been tamed, it is certainly much more under control, and the declining overall trend in inflation rates continues. The central bank may well now cut key interest rates a further 0.5 basis points at the next meeting.

The highest monthly increase was 4,26% in the index for housing by main expenditure groups. The indices rose for miscellaneous goods and services 2,61%, for food and non-alcoholic beverages 1,83%, for transportation 1,33%, for communication 1,02%, for hotels, cafes and restaurants 1,00%, for furnishings and household equipment 0,61%, for health 0,17%, for education 0,02%, while the indices declined for alcoholic beverages and tobacco -0,01%, for recreation and culture -1,05%, for clothing and footwear -10,22%.

Turkey Labour Force Survey October 2007

2008-01-29T23:43:00.000+01:00

Working age population increased by 874 thousand in the period of October 2007 compared to the same period of the previous year

While non-institutional civilian population increased by 913 thousand persons and has reached to 73 million 792 thousand persons, non-institutional working age civilian population has increased by 874 thousand and has reached to 52 million 796 thousand persons in the period of October 2007.

Non-agricultural employment increased by 170 thousand

Number of employed persons decreased by 55 thousand persons compared to the same period of the previous year and has reached to 22 million 750 thousand persons in the period of October 2007. Agricultural employment decreased by 225 thousand persons and non-agricultural employment increased by 170 thousand persons in this period.

Of those who were employed in October 2007; 25.9 % was employed in agriculture, 20.2 % was employed in industry, 6.2 % was employed in construction and 47.7 % was employed in services. Employment in agriculture decreased by 0.9 while that industry increased by 0.1 percentage points and services increased by 0.8. The share of construction is realized without any change.

Number of unemployed persons increased by 114 thousand persons compared to the same period of the previous year and has reached to 2 million 458 thousand persons in Turkey. Unemployment rate realized as 9.7 % with 0.4 points increase. Unemployment rate increased to 11.8 % with a 0.5 percentage points increase in urban areas and increased to 6.6 % with 0.2 percentage points in rural areas.

Non-agricultural unemployment rate realized as 12.3 % with 0.4 percentage points increase compared to the same period of the previous year in Turkey. The rate is realized as 10.7 % with a 0.4 percentage points decrease for male and 18.6 % for female without any change.

In this period, of those who were unemployed;

• 70.8 % were male.
• 54.8 % had education below high school.
• 29.4 % were seeking job for one year or more.
• Unemployed persons were commonly seeking job through “their acquaintances” (30.7 %).
• 80.8 % (1 million 987 thousand) had worked previously.
• Among those who were employed previously; 49 % were employed in “services”, 23.3 % were employed in “industry”, 17.8 % were employed in “construction”, 9.9 % were employed in “agriculture”.

In this period, of those who were employed;

• 74.6 % were male,
• 61.2 % had education below high school.
• 59 % were regular and casual employee, 27.2 % were self-employed and employer,
13.8 % were unpaid family worker.
• 61.1 % worked in establishments consisting of “1-9 employees”.
• 2.4 % had an additional job.
• 3.2 % was seeking job either to replace the current job or to augment the existing job.
• 86.8 % of regular employees worked in permanent jobs.

The ratio of persons who worked without any social security related to the main job declined to 46.9 % with 1.7 percentage point decrease. The share of persons who did not have any social security in agriculture decreased from 88 % to 87.6 % and that in non-agriculture decreased from 34.2 % to 32.7 % compared to the same period of the previous year.

Labour force participation rate (LFPR) decreased to 47.7 % with 0.7 percentage points decrease compared to the same period of the previous year for Turkey in October 2007 period. LFPR was realized as 71.6 % with 0.4 percentage point decrease for male and decreased to 24.4 % with 0.9 percentage point decrease for female. LFPR was 45.5 % with a 0.3 percentage point decrease in urban areas and 51.8 % with a 1.3 percentage points decrease in rural areas in this period. As for the distribution of labour force by education and age group;

Turkey Industrial Output November 2007

2008-01-29T23:27:00.000+01:00

According to data from Turkstat, the Turkish Monthly Industrial Production Index reached 156.2 in November 2007 and increased by 7.7 % when compared with November of 2007.

At the sub sector level, the mining index rose from 95.8 to 100.8 - increasing 5.2 %, manufacturing industry rose from 144.8 to 156.5 - increasing 8.1 %, electricity, gas and water rose from 176.5 to 185.6 increasing by 5.2% compared with November 2006.

When the eleven-month average of 2007 is also compared to previous year, total industry rose from 137.2 to 144.8 increasing by 5.5 %, mining rose from 97.7 to 108, increasing by 11.4 %, manufacturing industry rose from 136.5 to 143 increasing by 4.8 %, electricity, gas and water rose from 168.8 to 184,increasing by 9.2 %.

Consumer Confidernce Index December 2007

2008-01-29T22:41:00.001+01:00

Turkey's Consumer Confidence Index, which was 92.52 in November 2007, increased by 1.48% compared to November 2007 and became 93.89 in December 2007.

Turkey Population Statistics

2008-01-22T17:43:00.000+01:00

The Turkish Statistics Institute (TurkStat) has now published the results of the recently conducted census, and the data show Turkey's population to be currently slightly over 70 million.

Interior Minister Beşir Atalay announced on Monday that according to the Address-Based Birth Recording System (ADNKS), Turkey's population stood at 70,586,256 as of the end of 2007. State Minister and Deputy Prime Minister Nazım Ekren gave the number of third country nationals living in Turkey as 98,339, noting that not counting the foreign population, Turkish citizens residing in Turkey number 70,487,917.

According to the figures Ekren gave, 70.5 percent of the population lives in cities while the remaining 29.5 percent lives in towns and villages. The average age is 28.3 years; half of the country's population falls below this average.

İstanbul hosts 17.8 percent of the country's population, at a density of 2,420 people per square kilometer. Having the highest population density, İstanbul is home to 12,573,836 people. According to ADNKS, there are 35,376,533 men and 35,209,723 women in Turkey. A total of 49,747,859 people live in cities, while 20,838,397 reside in towns and villages. Ankara province is the most urbanized of all provinces with 92.7 percent of its population living in cities, while Ardahan province has the lowest urbanization rate at 31.8 percent.

According to provincial proportions of total population, İstanbul ranks first with 17.8 percent of the total, followed by Ankara with 6.3, İzmir with 5.3, Bursa with 3.5 and Adana with 2.8 percent. The five provinces with the lowest populations are Bayburt, Tunceli, Ardahan, Kilis and Gümüşhane. Bayburt is home to 76,609 people. The capital of the country, Ankara, hosts 4,466,756 people.

The average age of the population is 27.7 for men and 28.8 for women while it is 28.4 among the urban population and 27.9 among the rural population. The 15-64 age group, those of employable age, account for 66.5 percent of the country's population. The 0-14 age group corresponds to 26.4 percent of the population while the 65 and above age group makes up 7.1 percent.

The population density, i.e., the number of people per square kilometer, is 92 for the country while it ranges between 11 and 2,420 among provinces. İstanbul's population density of 2,420 people per square kilometer is followed by Kocaeli with 398 people, İzmir with 311, Hatay with 238, and Bursa with 234. With 11 people per square kilometer, Tunceli has the lowest population density in the country. The population density is 50 people per square kilometer for Konya, which has the largest surface area of all provinces in Turkey, and 215 for Yalova, which has the smallest.

Moreover, foreign nationals living in Turkey account for 14 per 1,000 of the country's population. İstanbul is their city of choice (42,228), followed by Bursa (11,495), Ankara (7,166), İzmir (6,707) and Antalya (6,343).

The ADNKS was established by TurkStat but was later transferred to the Population and Naturalization General Directorate.

Ekren noted that the population was 67,803,927 in 2000 and had increased by 4.10 percent by the end of 2007.

A number of indicators will be changed in Turkey following this recent and more accurate census. Assessments and estimates will be made in a number of fields, including income per capita, the number of deputies per province and the allotment from the central budget for local administrations.

The Turkish Parliament passed a law on April 25, 2006 stipulating that a National Address Database (UAVT) that would contain all addresses of people living in Turkey be set up, that the residential addresses of Turkish citizens and foreign nationals should be identified and that the ADNKS should be established in which these addresses should be synchronized with civil registers in the Central Population Management System (MERNİS) using the ID numbers of Turkish citizens and passport numbers of foreign nationals. In this context, house numbering and address identification work was conducted to serve as the basis of the UAVT. Then, visits to these houses were made to interview the residents, and data were collected on forms. Following that, the two were synchronized to determine the population.

The number of ID holders issued by the Turkish state was 74,900,000 based on records maintained by the Interior Ministry's Population and Citizenship Services General Directorate's MERNİS. However, the exact figures on how many of these citizens resided abroad were not available. The results have confirmed that the system was not properly installed.

Turkey's Central Bank Lowers Rates to 15.5%

2008-01-17T09:33:00.000+01:00

Turkey's central bank lowered its benchmark interest rate by a quarter of a percentage point to 15.5 percent today, the fourth consecutive reduction, after the economy grew at the slowest pace in six years and inflation expectations fell.

Economic growth slipped to 1.5 percent in the third quarter, the slowest pace since a 2001 recession, after the central bank raised borrowing costs by 4.25 points in June and July 2006 to restrain inflation. Since September, the bank has lowered the benchmark rate by 2 points.

The inflation rate was 8.4 percent in December, unchanged from the previous month and more than double a year-end target of 4 percent backed by the International Monetary Fund. While drought and increases in tobacco and fuel taxes drove up inflation from a three-decade low of 6.9 percent in July, price growth will resume its decline in the medium term, the bank said on Dec. 27.

Turkey's 12-month inflation forecast fell to 5.94 percent from 6.14 percent, according to a fortnightly survey of economists and businessmen published by the bank on Jan. 9. Turkey targets inflation of 4 percent this year.

Clearly the central bank is taking the view that the risks from slowing growth and the global environment outweigh inflation concerns at this point.

The prices of unprocessed food - which have been a major part of the headache - appear to have stabilized somewhat in the last two months of 2007, leading to a reduction in the annual inflation of this subgroup. Meanwhile, despite a relative slowdown, processed food prices continued to increase at a rapid rate and the 9.8 percent increase in processed food prices in the second half of the year adversely affected the core inflation indicators. Recent data is suggesting a rather more favorable weather outlook, boding well for the future prices of unprocessed food group. On the other hand, the response of processed food prices to agricultural supply shocks is likely to persist for some time; therefore, price increases in this group may continue for some months into 2008.

Energy prices rose by 0.89 percent in December as a result of hikes in energy items
in the housing group. With these hikes, annual inflation in the energy subgroup
rose to 11.25 percent. A further rise in annual inflation in the energy sector is expected in January due to increases in the price of electricity and natural gas. The bank expect this price adjustment to contribute by 0.6 points to CPI inflation in January.

Year on year increase in the prices of goods excluding energy and unprocessed food climbed to 6.6 percent due to an uptick in processed food inflation and the base effect on the clothing-footwear group. Generally, however, the downward trend in the prices of consumer durables continued in December.

A variety of recent data indicate that the recovery in economic activity continued in the last quarter of 2007. Industrial production rose by 8.3 percent and 7.7 percent year-on-year in October and November, respectively, and the average of October-November period exceeded the third quarter average in seasonally adjusted terms. Seasonally adjusted figures on capacity utilization also suggest that the growth in industrial production continued into December.

Leading indicators on consumption and investment present a similar outlook. Domestic sales of automobiles increased by 36.6 percent quarter-on-quarter in Q4 2007 and picked up markedly in seasonally adjusted terms compared to the third quarter. The moderate growth in consumer loans continued in December. The month-on-month change in automobile loans turned positive in real terms for the first time since June 2007. Real imports of consumer goods, passenger cars and consumer durables in particular, increased significantly on a year-on-year basis in the last quarter of 2007.

Leading indicators for investment demand point to an increase in machinery equipment
investments on a year-on-year and per quarter basis in the last quarter of 2007. In the October-November period, imports of capital goods increased by 36.2 percent relative to the same period last year, exceeding the level recorded in the third quarter in seasonally adjusted terms. Following a rebound in the third quarter, sales of light commercial vehicles maintained the upward trend in the last quarter growing by 23.6 percent in annual terms and recording a discernible rise in seasonally adjusted terms over the third quarter. Meanwhile, sales of heavy commercial vehicles have declined continuously on a monthly basis since September 2007, but rose by 1.6 percent year-on-year in the last quarter. Moreover, seasonally adjusted figures on production and import of machinery-equipment and electrical machinery point to a pick up ininvestments in the last quarter.

In the third quarter, the number of construction permits, one of the leading indicators of construction investments, decreased by 10.8 percent on a year-on-year basis, while the annual growth rate of the construction sector significantly lagged behind the growth rates observed in previous periods. The diffusion index of “the probability of purchasing or constructing a house in the next 12-month period”, compiled from the Consumer Confidence Survey, has been on a downward trend since July 2007, suggesting that the slowdown in the growth rate of housing construction is likely to persist in 2008. On the other hand the significant rise in employment in the construction sector in seasonally adjusted terms which took place during the second and third quarters of the year together with the marked increase in the production of non-metallic minerals in the last quarter signal that the slowdown in construction sector may well be fairly modest.

Exports rose by 13.5 percent in real terms compared to the same period last year according to quantity indices. Early readings on December and January also point to a continued upward trend in exports. Nevertheless, the growth rate of exports was surpassed by the growth rate of imports in the fourth quarter due to recovery in domestic demand and substantial increases in imports. Therefore, the effect of net foreign demand on growth is likely to be negative in the fourth quarter. The expected slowdown in the economic activity of developed countries has increased the downside risks on the course of exports.

In the third quarter of 2007, the pace of productivity growth fell behind real wages in manufacturing industry, leading to an increase in unit labor costs. Nonetheless, the slowdown in employment and the increase in productivity gains in the last quarter of the year points to a possible renewal of the downward trend in unit labor costs in the manufacturing industry.

The lira has gained almost 7 percent against the dollar since the bank began cutting rates in September. Gains for the lira help curb inflation by lowering the cost of imported raw materials and consumer goods.

Turkey Inflation December 2007

2008-01-05T23:21:00.000+01:00

Turkish consumer prices rose 0.22 pct in December from November to reach 8.39 pct on a 12-month basis, more than double the government's inflation target, according to data released by Turkstat earlier this week. This made the second year in a row Turkey missed its year-end inflation target under an economic recovery programme backed by the International Monetary Fund (IMF).

Producer prices climbed also by 0.15 pct from November to December for a total increase of 5.94 pct in 2007, the institute said. The Central Bank has blamed higher oil prices and a long-lasting drought for the figure and warned last month planned electricity, natural gas and food prices rises would continue to pose risks to limiting inflation.

In 2006, inflation was 9.65 pct, nearly double the austerity programme's 5 pct target. Tight IMF-backed financial policies had helped the government beat inflation targets over the previous three years, bringing the rate down from 29.7 pct in 2002 to 7.7 pct in 2005. Turkey has set its year-end inflation target at 4 pct for 2008, 2009 and 2010.

Turkish GDP Q3 2007

2008-01-02T23:30:00.000+01:00

Gross Domestic Product (GDP) increased by 1.5 percent in the third quarter of 2007 compared with the same period of 2006. This was obviously a slowdown, although the very low year on year performance owes a good deal to slowing growth in earlier quarters than to any special slowdown in Q3. Seasonally adjusted data, however, point to a 0.6 percent decline over the second quarter. Domestic demand gave a strong boost to GDP in Q3, while the public sector impetus slowed; the contribution of net foreign demand, however, was noticeably negative, and this is perhaps the most significant detail. While the lagged effects of the monetary tightening have continued, albeit at a weaker rate, temporary supply shocks in the agricultural sector have accentuated the slowdown in economic activity.

The nine months growth rate of gross domestic product in 2007 has increased by 11.6% to 468 212 million New Turkish Liras in current prices and 3.8% to 121.7 million New Turkish Liras in constant prices while - due to the rise in the value of the lira in comparison with USD - gross national product increased by 19.2% in dollar terms to 348 472 million USA dollar.

The contribution of private consumption demand to growth increased significantly over the third quarter, consistent. In seasonally adjusted terms, private consumption demand, which has grown modestly since mid-2006, increased by 2.3 percent in this period compared to the previous quarter, largely on the back of spending on durables and semi- or non-durables

The year on year growth rate of private final consumption expenditure in Q3 was 3.6, while government final consumption expenditure 6.4%, gross fixed capital formation 5.7%, exports of goods and services 7.5%, imports of goods and services 16.8% (all in constant prices).

On a more positive note, leading indicators for the fourth quarter point to a moderate recovery in economic activity. Industrial production grew by 7.9 percent year-on-year in October and was up markedly from September in seasonally adjusted terms.

Indicators for private consumption and investment demand also suggest a similar outlook. According to the seasonally adjusted data, following a downbeat reading in September, domestic sales of automobiles grew rapidly in the October-November period compared to the third quarter. The CNBC-e consumption index also exceeded its third-quarter average. Moreover, imports of consumer goods jumped in October compared to the same month last year. Seasonally adjusted domestic sales of white goods also rebounded in October but remained below the third-quarter average.

Despite a slowdown in machinery-equipment production, imports of machinery-equipment gained speed in October over September and also the preceding quarter. In addition, both production and imports in the electrical machinery industry increased significantly on a year-on-year and per quarter basis. Following a rebound in the third quarter, domestic sales of light commercial vehicles recorded high growth rates during the October-November period compared to the previous quarter. Imports of capital goods grew sharply by 41.3 percent in October on a year-on-year basis and seasonally adjusted figures point to a continued acceleration. In sum, leading indicators except for machinery-equipment production suggest that investments picked up in the fourth quarter on a yearly and quarterly basis.

Exports continue to expand owing to productivity gains and on the back of strong external demand. Preliminary data indicate that exports recorded a high growth rate in November in dollar terms. Nevertheless, according to quantity indices that exclude the price effect, real exports grew at a lower pace than real imports in the second half of the year. The strengthening demand for imported goods, particularly automobiles and commercial vehicles and other capital goods, signal that the contribution of net foreign demand to growth will continue to be negative in the last quarter.

Turkey Inflation November 2007

2008-01-02T22:21:00.000+01:00

Consumer prices rose by 1.95 percent in November, bringing the annual inflation to 8.40 percent. Administered prices accounted for about 1 percentage point of the month-on-month increase in headline inflation. The upward trend in the prices of processed food and catering services group suggest that the drought continued to be effective on food inflation in November as well.

Energy prices edged up sharply in November by 6.78 percent, raising the annual inflation in this group to 11.02 percent. This was mainly attributable to the rise in the prices of fuel oil and LP gas, driven by hikes in the Special Consumption Tax, as well as to the new municipal water tariff in stanbul. Aside from adjustments in administered prices, the recent increase in international oil prices was also instrumental in the rise of energy prices. The planned hikes in electricity and natural gas prices in the upcoming period, together with the future course of oil prices, pose a significant risk to energy prices.

Despite the decline in the prices of clothing and footwear, the year-on-year inflation in goods excluding energy and unprocessed food posted an increase in November due to significant price hikes in processed food, tobacco products and gold. The prices of consumer durables, on the other hand, maintained its downward trend in November. Following the tax hikes on tobacco products, the prices of alcoholic beverages and tobacco group increased by 6.51 percent month-on-month, bringing the annual inflation rate for this group to 17.21 percent. In other words, nearly 0.85 percentage pointsof the annual CPI inflation stems from the tobacco prices.

Turkey's Performance in 2007

2008-01-02T21:42:00.000+01:00

The Turkish lira posted its biggest annual gain yet against the dollar in 2007 as the central bank kept interest rates three times higher than in the U.S. and Prime Minister Recep Tayyip Erdogan won elections in July. The lira rose a record 21 percent versus the U.S. dollar in 2007, more than any emerging-market currency Even the conflict with Kurdish rebels in northern Iraq has failed to dent optimism Erdogan would extend 23 consecutive quarters of economic growth.

The Turkish central bank kept its benchmark interest rate at 17.5 percent until September, before cutting it in each of the past four months by a combined 1.75 percentage points to 15.75 percent. The Fed's key rate is 4.25 percent, while the Bank of Japan's is 0.5 percent, making the lira attractive for the so-called carry trade, where funds are borrowed in low interest-rate currencies and used to buy higher-yielding assets.

Erdogan's Justice and Development Party won July's parliamentary elections with 47 percent of the vote, more than twice that of its nearest rival. The Turkish economy has doubled to $400 billion under Erdogan's government. The country attracted $20 billion in foreign investment in 2006.

Turkish bonds gained in 2007, with yields falling an average 4.58 percentage points, according to an ABN Amro Holding NV Index. Yields rose 7.36 percentage points last year.

Merry Xmas and A Happy New Year

2007-12-25T00:07:00.000+01:00

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

2007-11-04T22:53:00.000+01:00

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

2007-11-04T22:13:00.000+01:00

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

2007-10-22T18:49:00.000+02:00

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

2007-10-15T20:45:00.000+02:00

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

2007-10-10T14:12:00.001+02:00

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

2007-10-09T23:02:00.000+02:00

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

2007-10-02T11:17:00.000+02:00

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

2007-09-27T12:45:00.000+02:00

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

2007-09-26T22:09:00.000+02:00

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

2007-09-26T21:16:00.000+02:00

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

2007-09-26T21:00:00.000+02:00

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

2007-09-19T12:42:00.000+02:00

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

2007-09-19T12:29:00.000+02:00

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

2007-09-16T12:47:00.000+02:00

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

2007-09-10T09:49:00.000+02:00

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

2007-09-10T09:21:00.000+02:00

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