Turkey Consumer Price Index August 2007

According to the Turkish Statistics Office the august monthly change in CPI was 0,02%.

This rise in the general index was up by 7.93% on same month of the previous year and the twelve months moving averages was 9,46% in August 2007.



The highest monthly increase was 1,69% in the index for food and non-alcoholic beverages.

The indices rose for hotels, cafes and restaurants 0,71%, for housing 0,70%, for miscellaneous goods and services 0,66%, for recreation and culture 0,57%, for education 0,26%, for health 0,13% while the indices declined for furnishings and household equipment -0,04%, for transportation -0,10%, for communication -2,92%, for clothing and footwear -7,13%. The index for alcoholic beverages and tobacco remained unchanged.

As I said, the highest annual increase was in the index for food and non-alcoholic beverages. It would perhaps be well to remember that this category represents some 28.5% of the CPI in Turkey.

Turkey Producer Price Index August 2007

According to the Turkish Statistics Office the August monthly change in the PPI was 0,85%. In the chart below we can see the evolution of the monthly changes on a year by year basis. They have now been dropping steadily since July 2006.



A rise in general index was realised in the 2003=100 based Producer Price Index on the previous month by 0,85%, on December of the previous year by 3,93%, on same month of the previous year by 3,72% and on averages of twelve months by 8,29% in August 2007.

Monthly changes were 0,71% in the index of agriculture and 0,89% in the index of industry.

PPI of agriculture increased 10,07% compared with December of the previous year, 8,99% compared with the same month of the previous year and 5,15% on the averages of twelve months basis. PPI of industry section increased 2,57% compared with December of the previous year, increased 2,55% compared with the same month of the previous year and 9,01% on the averages of twelve months basis.

The highest monthly increase in the PPI of industrial activities was recorded 6,25% in the index for crude petroleum and natural gas production.

There were increases 3,31% in the index for mining and stone quarrying, 0,60% in the index for manufacturing industry and 3,84% 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 crude petroleum and natural gas production (6,25%), for electricity and gas (4,43%), for metallic minerals (2,85%), for office accounting computing machinery (1,94%), for furniture (1,67%), for coke and refined petroleum (1,53%) and for food products and beverages (1,33%).

On the other hand index declined for wearing apparel (-3,99%), for dressing of leather (-1,76%), for medical, precision,optical instruments (-0,80%) compared with the previous month.

The high rates of annual increase were in the industrial price indices for electricity and gas (20,09%), for metallic minerals (13,47%), for food products and beverages (10,92%) and coal, lignite and peat production (10,63%).

Prices of 369 items increased in total of 759 items covered in the index.

In August 2007 within average prices of 759 items in the index, average prices of 211 items remained unchanged while average prices of 369 items increased and average prices of 179 items decreased.

Turkey Foreign Trade Statistics July 2007

Exports increased by 24.3% in January - July compared with the same period of the last year...

According to the provisional data, in July 2007; exports grew by 26% and reached to 8,907 Million Dollars, and imports grew by 28.5% and reached to 15,041 Million Dollars. At the same period, foreign trade deficit raised by 32.1%, reached from 4,642 Million Dollars to 6,134 Million Dollars.

In July 2007 exports coverage imports was 59.2% while it was 60.4% in 2006.

In January-July 2007, exports grew (24.3% in 2007 compared with 2006) to 58,413 Million Dollars; imports grew (18.6% in 2007 compared with 2006) to 92,512 Million Dollars. As compared with the same period of the previous year, the foreign trade deficit was up by 9.9% reached to 34,099 Million Dollars.

57.1% of the exports to the European Union...

The weight of the EU in Exports has continued in January-July 2007 period. As compared with the same period of the previous year, exports to EU were 33,332 Million Dollars increased by 25.5%. The proportion of the EU countries was 57.1% while the proportion of Free Zones in Turkey was 2.8% and the others was 40.1%.

In January-July 2007, the main partner for exports was Germany with 6,605 Million Dollars and increased by 22.1%. In July 2007, exports to Germany was 983 Million Dollars and increased by 28.3% in comparison with the same period of the previous year. For exports, Germany was followed by the UK (751 Million Dollars), Italy (571 Million Dollars), France (486 Million Dollars), Spain (408 Million Dollars) and Russia (398 Million Dollars).

In January-July 2007, while the European Union Countries were the most intensive country group for imports (37,598 Million Dollars), followed by other European Countries (18,934 Million Dollars), Asian Countries (24,350 Million Dollars) and Free Zones in Turkey (691 Million Dollars).

For July 2007, the top country for Turkey’s imports was Russia (2,025 Million Dollars), records for imports range from Germany (1,448 Million Dollars), China (1,113 Million Dollars), Italy (962 Million Dollars) and Switzerland (904 Million Dollars).

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

For January-July 2007, road vehicles and their parts has by far the highest value exported at 8,976 Million Dollars and then, iron and steel 5,023 Million Dollars, machineries, mechanical appliances, boilers, equipments and parts 4,910 Million Dollars and articles of apparel and clothing accessories knitted 4,616 Million Dollars.

At the same period, the top categories for imports were mineral fuels and mineral oils (17,520 Million Dollars) and then machineries, mechanical appliances, boilers, equipments and parts (12,279 Million Dollars) and iron and steel (9,178 Million Dollars).


In July 2007, the volume indices increased.

In July 2007, according to foreign trade indices, with the 2003 base year, produced by the provisional foreign trade data, the overall export and import volume indices increased by 12.5% and 20.5% respectively, compared to the corresponding month of the preceding year.

In July 2007, by the corresponding month of the preceding year, while the export volume index for agriculture and forestry decreased by 35.4%, fishery, mining and manufacturing increased by 61.4%, 28.5% and 13.9% respectively.

The import volume index for agriculture and forestry, mining and manufacturing went up by 54.6%, 7.8% and 23.9% respectively, over the same month.


The unit value indices rose.

In the year to July, compared to the corresponding month of the preceding year, the overall export and import unit value indices rose by 12.2% and 8% respectively.

In the same month, compared to July 2006, the export unit value index for fishery fell by 5.7%. On the other hand, the same index for agriculture and forestry, mining and manufacturing increased by 28.5%, 21.9% and 11.6% respectively.

In July 2007, the import unit value index for agriculture and forestry, mining, manufacturing, raised by 11.3%, 2.6% and 8.7% respectively, as compared with the corresponding month of the preceding year .

From July 2006 to July 2007, the export unit value index for textile and wearing apparel, the major components of the index, increased by 10.6% and 13.8% respectively.


The volume indices for motor vehicles and trailers increased.

In July 2007, compared to July 2006, the volume index of export and import for motor vehicles and trailers went up by 23.2% and 8.6% respectively.

In the year to July, compared with the corresponding month of the preceding year, the export and the import volume index for manufacture of basic metals, one of the important sector within manufacturing sector increased by 6.9% and 82.3% respectively. The export and import unit value indices for the same sector rose by 17.7% and 12.4% respectively

The Lira and the Dollar

What a ride we had — from the ocean of liquidity to the desert of uncertainty, as the unwinding of the credit cycle has undermined confidence and led to the sudden withdrawal of market liquidity. Aftershocks of the financial turmoil eased in recent days, but there is still a dichotomy in markets about the future direction of the global economy. For the time being, real economic fundamentals stand strong against a hard-landing scenario. However, even though we have no doubt about structural improvements (especially in emerging economies), the global economy is vulnerable to financial turbulence and a major downturn in the US business cycle. After all, expansionary financial conditions in the last six years had an overwhelming effect on economic activity across the world. Therefore, even if we assume the resilience of structural gains, tighter financial conditions would still have an adverse effect on the real economy. Furthermore, a broader repricing of risks implies a possible contraction in cross-border capital movements that could put pressure on emerging market currencies. In Turkey’s case, for example, the exposure to liquidity-driven capital flows represents the most critical vulnerability.



Nevertheless, having such a ‘weak spot’ does not necessarily mean that there are no cushions to safeguard the economy against exogenous changes in global risk appetite. First, economic fundamentals are now far stronger than at any other time in recent history. Second, the banking sector is robust and liquid enough to provide funding to the troubled European banks. Third, residents accumulated more than US$30 billion in foreign currency-denominated deposits over the last year, which now stands at US$90 billion against foreign investors’ US$32 billion in domestic government debt.




The lira has already depreciated by more than 5% against the dollar in the last couple of days, with a sharp increase in its degree of volatility. Despite all the fundamental improvements in the economy, Turkey remains susceptible to the unwinding of carry trades because of its significant exposure to liquidity-driven capital flows. Foreign investors own about 45 billion lira worth of domestic debt, accounting for 38.1% of non-bank holdings in the country (up from 32.7% at the end of 2006 and 20.7% last summer). The extent of international portfolio investments is not limited to the fixed income market, as foreign investors also hold 72% of free float in the equity market (see The Istan-Bull Paradox, June 13, 2007). Therefore, it would not be surprising to see a global liquidity squeeze and a possible increase in home bias leading to abrupt portfolio and exchange rate adjustments. Given the sensitivity of consumer price inflation to currency fluctuations and changes in inflation expectations, we have no doubt that the deepening of liquidity concerns will affect the timing and magnitude of interest rate reductions.

Yesterday the Hungarian forint snapped a four- day rally against the euro as a decline in global stocks crimped demand for riskier, emerging-market assets. The forint fell from a two-week high as the NTX Index of stocks in central and eastern Europe's 30 biggest companies slipped for the first day in a week. Poland's zloty, Turkey's lira and the Romanian leu all dropped.


Against the euro, the forint fell to 257.68 by 4:42 p.m. in Budapest, from 256.15 late Tuesday.

The Turkish lira fell to 1.3292 per dollar, from 1.3185 Monday, when it touched a two-week high. Turkey's Foreign Minister Abdullah Gul won a parliamentary election to become the country's president today.

The Polish zloty slid 0.1 percent from near a week-high to 3.8305 per euro, while Romania's leu traded at 3.2527 versus the common European currency, from 3.2446.

The Czech koruna rose to 27.681 per euro, from 27.771 yesterday. Investors borrow the koruna at its relatively low 3 percent interest rate to fund higher-yielding purchases elsewhere in the so-called carry trade, so the currency tends to strengthen when they pare riskier investments.

The Slovak koruna was little changed at 33.766 against the euro after the Bratislava-based central bank kept its two-week repurchase rate at 4.25 percent, as forecast by economists surveyed by Bloomberg News.

On Monday

Turkey's lira rose to a two-week high against the dollar as an advance in Asian and European stock markets stoked investor appetite for higher-yielding assets.

The lira added to last week's advance, its best performance in more than a year, as investors bought the currency by borrowing the Japanese yen or Swiss franc more cheaply. The NTX Index of stocks in central and eastern Europe's 30 biggest companies advanced for a fourth day while Istanbul's ISE National 100 index rose the most in almost a week.

``The Turkish lira is mainly driven by risk sentiment,'' said Elisabeth Andreew, chief currency strategist at Nordea Bank AB in Copenhagen.

Against the dollar, the lira gained as much as 1.6 percent to the highest since Aug. 14, and traded at 1.3180 by 4:12 p.m. in Istanbul, from 1.3327 at the end of last week. The currency also rose versus the euro, to 1.7993 from 1.8166 on Aug. 24.

Turkey's government bonds rose, according to an ABN Amro NV index of debt yields.

So-called carry trade investors buy lira-denominated assets because of Turkey's 17.5 percent interest rate, the highest in Europe.

Consumer Price Inflation in Turkey August 2007

Consumer price inflation is generally on the decrease in Turkey, although the annualized rate is likely to pick up a little in the next couple of months. 2007 started disappointingly in this respect since a surge in unprocessed food price inflation from 12.9% at the end of 2006 to 20.7% in January pushed the headline inflation figure up. However, the lagged effects of monetary tightening on domestic demand and the gradual correction in food prices have helped to bring inflation dynamics onto a more favourable trajectory and as a result, consumer price inflation eased from 10.9% in March to 8.6% in June and 6.9% last month (see graph below).



This is the lowest inflation reading Turkey has been able to achieve in the past four decades and confirms the secular character of the current disinflation in Turkey.It therefore looks perfectly possible that the CPI headline rate can be in the 6% range by the end of the year and can get below 4% during the second quarter of next year.

It is unrealistic, however, to expect this to be an entirely linear process, and there are bound to be ups and down in store for us along the road. Indeed the year-on-year inflation rate may well increase in the next couple of months. The principal culprits here will undoubtedly be base effects and the behaviour of food prices (see below). There is also the risk emerging from higher volatility in global markets. It is not a secret that inflation — and therefore the monetary policy stance — is susceptible to change in global risk appetite through the effect of this on Turkey's exchange rate.

In Turkey, for example, food prices account for 28.5% of the CPI and thereby can turn into a major source of volatility. Over the last couple of years, food price inflation declined from 12% at the beginning of 2004 to 4.9% at the end of 2005, but then surged to 14.6% earlier this year. Although the year-on-year rate of change in food prices eased to 9.2% last month, as Serhan Cevik points out Turkey is very dependent on meteorological data and thus prices for unprocessed food still face a volatile future.

Global warming is not just about warmer weather, but also — more importantly — leads to unpredictable changes in variability patterns. One of the immediate consequences of extreme weather conditions is droughts with greater severity that cause agricultural supply shocks and higher volatility in food prices (see Stay Tuned to the Weather Channel, August 4, 2006). And we may now be observing such an event on a global scale, as the ratio of stocks to consumption dropped to its lowest reading on record, leading to a sustained increase in food prices. Indeed, virtually every country around the world has experienced a surge in food prices and consequently pressures on headline inflation rates.
Serhan Cevik, Morgan Stanley

However, a closer look reveals that there has been a sharp slowdown in private consumption (especially of durable goods that are sensitive to interest rates). In our view, all these real factors have helped in lowering durable goods inflation (excluding gold) from 3.1% at the start of the year to -2.2% in July.




Even the infamously sticky non-tradable inflation eased from 12.2% to 10.2%, contributing to the drop in the seasonally adjusted annualized inflation rate from 12.8% just a few months ago to 2.4% on the last reading (see graph below).





To get some idea of the evolution of Turkish prices over the years, here is a graph of the price index itself from 2003:

The quality of disinflation has improved in the past couple of months, as the seasonally adjusted annualised inflation rate over three months moved from 12.8% in April to 6.1% in June and 2.4% last month. Deflationary pressures on tradable goods have certainly played an important role, lowering durable goods prices (excluding gold) by 2.2% in July. Although the lira’s appreciation had an obvious effect, the key factor is still the correction in domestic demand, in our view. The growth rate of consumer spending dropped from 9.9% in the first half of last year to 1.3% in the second half and 1.6% in the first quarter of this year. No wonder, even non-tradable inflation showed a slow but steady improvement, declining from 12.2% at the end of 2006 to 10.2% last month. This is why we expect consumer price inflation to come down to 6.2% by the end of the year and then just below 4% in the second quarter of next year. However, there are early signs of recovery in domestic demand and the unwinding of carry trades could also easily turn into a source of inflation. Therefore, we expect the Central Bank of Turkey to remain on hold in the coming months and to initiate a gradual, measured easing cycle as long as the inflation trend moves in line with its target
Sehan Cevik, Morgan Stanley