STANDING FIRM

TURKEY’S CENTRAL BANK VOWS TO MAINTAIN TIGHT POLICY UNTIL INFLATION IMPROVES

Turkey’s Central Bank said on Oct. 12 that it would maintain its tight monetary policy until the inflation outlook displayed a significant improvement. “The tight policy stance will be maintained decisively to ensure the alignment of the inflation outlook with the targets,” Governor Murat Cetinkaya said in a presentation to investors at the IMF and World Bank meetings in Washington DC, according to a statement on the bank’s website. Factors affecting inflation will be closely monitored, Cetinkaya said, adding there would be further monetary tightening if needed. The bank kept rates steady for the third straight meeting on Sept. 14.

The country’s consumer prices went up by 11.20% in September year-on-year, according to the Turkish Statistical Institute (TurkStat) on Oct. 3. Since the beginning of this year, annual inflation saw its lowest level in January – 9.22% – and its highest level – 11.87% – in April. The government aims to reach 5% inflation in 2020, down from 8.5% in 2016 and is predicted to reach 9.5% by the end of 2017, in accordance with the country’s mediumterm program announced on Sept. 27.

Cetinkaya also noted that inflation was expected to decelerate from the end of the year. “Elevated levels of inflation and inflation expectations pose upside risks on the pricing behavior,” the governor said. “The pass-through impact from cost factors has been one of the main drivers of inflation in 2017.”

Cetinkaya said that leading indicators suggested strong growth in the third quarter of the year. “Net exports have contributed positively during the first half and consumption demand supports economic growth,” he said. “The ongoing recovery in tourism will support economic growth and external balance.”

Turkey’s economy grew 5.2% in the first quarter of 2017 and 5.1% in the second, compared with the same periods last year, according to TurkStat. On Oct. 11, the IMF upgraded its 2017 growth forecast for Turkey to 5.1% in 2017, up 2.6% from its previous forecast of 2.5%.

The IMF has revised upwards short-term growth expectations for emerging and developing Europe to 4.5% in its latest bi-annual World Economic Outlook (WEO) report (from 3% in April), citing Turkey’s strong economic growth in the first quarter of 2017 as the main driver.

The WEO report, Seeking Sustainable Growth: short-term recovery, long-term challenges, published in mid-October, compares current forecasts with those of its April report.

The report states that this change is driven “to an important extent by the revision to Turkey’s growth in 2017 to 5.1% (2.5% in April), reflecting a stronger-than-expected outturn in the first quarter of the year, driven in part by a recovery in exports after several quarters of contraction and a more expansionary fiscal stance.”

Huge growth swing since April

The 2.6% positive swing in Turkey’s growth forecast this year was the most extreme revision in the October WEO report and somewhat surprising compared with its April report, which stated: “Economic prospects in emerging and developing Europe are relatively favorable with the exception of Turkey,” where “a sharp slowdown” in growth in the third quarter of 2016 led the report to project “a modest acceleration in activity” for 2017 “based on stronger net exports and a moderate fiscal stimulus.”

In its October report, the IMF expects growth prospects for emerging and developing economies overall to rise by 0.1% for both 2017 and 2018, in line with a strengthening global upswing.

“Global growth, which in 2016 was the weakest since the global financial crisis at 3.2%, is projected to rise to 3.6% in 2017 and to 3.7% in 2018. The growth forecasts for both 2017 and 2018 are 0.1% stronger,” the IMF says in the report’s executive summary. “Growth forecasts have also been marked up for emerging Europe for 2017, reflecting stronger growth in Turkey and other countries in the region, for Russia for 2017 and 2018, and Brazil in 2017,” the report continued. “Financial market sentiment has generally been strong, with continued gains in equity markets in both advanced and emerging market economies.”

Downward US, offset UK revisions

The IMF report suggests that downward revisions for the US and the UK are more than offset by broad-based upward revisions after better than expected growth in the first half of 2017 in the eurozone, Japan, emerging Asia, emerging Europe and Russia.

In less good news for Turkey, the report notes that Turkey’s inflation rate has spiked, following depreciation of the Turkish lira, and is expected to remain above the 5% target throughout the forecast horizon.

Although the IMF report says the decline in oil prices had helped currencies to stabilize or gain against the US dollar since the spring, disinflation has “been more rapid than expected” in countries including Brazil, India and Russia, which has allowed “monetary policy easing,” but monetary policy will be required to stay tight in Turkey and Argentina, where “inflation rates remain well above central bank targets.”

The report advises Turkey, along with South Africa, to “simplify regulations and administrative procedures for starting a business, increase the efficiency of the legal system and reduce regulatory uncertainty” to improve financial risk perceptions.

Macro projections

The IMF’s latest report predicts an improvement in Turkey’s consumer price index (CPI) from a projected 10.9% in 2017 to 9.3% in 2018 compared with 10.1% and 9.1%, respectively, in its April report; with unemployment in the country expected to decline from a projected 11.2% in 2017 to 10.7% in 2018 compared with 11.5% and 11%, respectively, in April. In addition, the report expects Turkey’s current account deficit to remain at -4.6% of GDP in both 2017 and 2018, almost precisely the same as it projected in April.

Risks from geopolitical tensions

From a worldwide perspective, the WEO report warns that “…in an environment of high policy uncertainty and geo-political tensions, policy missteps – which the baseline assumes will be avoided – could take a toll on market confidence, resulting in tighter financial conditions and weaker asset prices.”

Turkey’s full plate of geopolitical considerations, which in recent years have been topped by Syrian civil war and this year’s ongoing spat with Germany, recently grew after last month’s Kurdistan referendum in Northern Iraq and last week’s non-immigrant visa ban by the US.