WHAT TO EXPECT IN MARCH?
The economy had a slower start to 2022 after the rapid growth of 2021. Leading indicators also confirm that the 9,1% growth in the last quarter of 2021 and 11% annual growth will be followed by more moderate figures from the first quarter of 2022. On the production side, sectoral confidence indices had lower values in the purchasing managers’ index produced by the Istanbul Chamber of Industry in January and February than in previous periods.
THREE CRITICAL FACTORS
The economy will be determined by three factors in March: The Russia-Ukraine tension, the Fed’s interest rate decision, and the interest rate decision to be made by the Monetary Policy Committee.
PRODUCTION, which returned to normal after a nationwide power outage at the end of January, faces new risks ahead posed by the Russia-Ukraine crisis. If the tension between the two countries, from which Turkey imports the most agricultural products, lasts much longer, it might cause problems in several areas, especially in grain supply. Agricultural commodity prices went up by %23 in February, the sharpest monthly increase since 2015. Its worth underling that Russia and Ukraine make up one-third of the world’s wheat exports, one-fifth of corn exports, and four-fifth of sunflower oil exports.
Coal, iron-steel, and aluminum prices also increased sharply at the end of February. The continued volatility in prices in the coming days may cause COST INCREASES in the local supply chain. In the worst-case scenario, Russia cutting off the gas flow could have both direct and indirect effects, albeit unlikely.
These two countries are extremely important not only for our imports but also for exports of goods and services. Turkey made USD 5.9bn in exports to Russia and USD 2.9bn to Ukraine in 2021. However, the critical importance of these two countries is to our tourism revenues. In 2020 and 2021, the biggest income for the tourism sector came from Russia and Ukraine. The citizens of these two countries comprised four out of every ten tourists that visited Turkey. The prolongation or growth of the war may cause a serious DECREASE IN TOURISM REVENUES in 2022.
The Fed did not hold an interest rate meeting in February. But this month, on the evening of March 16, the Fed may make the first, long-expected rate hike. An increase of 25 basis points is expected as a first step. A 50-point increase in interest rate could increase volatility in the markets, as more than a 25-point increase is not currently within expectations. It’s all up to the Fed.
The next day, Turkey’s Monetary Policy Committee (MPC) will convene to determine the weekly policy rate. No change in interest rates is expected from the bank this month. If there weren’t the threat of rising foreign exchange rates and a growing military confrontation on Turkey’s door step, the Bank might consider lowering rates. However, these two factors increase the likelihood that that the MPC WILL KEEP RATES STEADY in March.
COULD THERE BE AN INTEREST RATE INCREASE?
We know that under normal circumstances, Turkey’s economic managers favor interest rate cuts. If volatility in the foreign exchange market were to ease, we could expect the Central Bank to take reductive steps again. However, the possibility of a RATE HIKE may arise in April, if not in March, due to rising commodity prices and the fact that this will provoke inflation again and push exchange rates up. The prolongation and growth of the Russia-Ukraine War will increase this possibility. Maybe it’s too early to talk about that right now. However, if there is movement in this direction, we can expect a heavy and fast increase. The wave of interest rate hikes abroad will also strengthen the likelihood of this option.
FOREIGN TRADE AND CURRENT ACCOUNT BALANCE
Exports continued to be strong during the first two months of the year. This trend will likely continue in March. However, we will see a DECREASE IN
OUR EXPORTS to Russia and Ukraine, especially in agricultural products, until the end of the war. Turkish companies have about 1,000 stores in Russia and 200 in Ukraine. Shuttle trade to both countries has also come to a standstill.
The rise in natural gas and oil prices has already caused a spike in our energy imports. We will see that price increases in agricultural products will increase the deficit in March. However, signs of a SLOWDOWN IN DOMESTIC DEMAND will suppress imports on a quantity basis in the coming months.
It seems it will be difficult to realize the frequently mentioned target of having a current account surplus in 2022. The fact that foreign exchange revenues will decrease in many sectors makes this goal impossible while the current account balance can’t post a surplus, even without war. This may increase the already RISING
PRESSURE ON TL.
The current account balance in December, which was announced in February, showed a USD 3.8bn deficit. The deficit shown in December was the highest in 2021 on monthly basis. The current account had a deficit of USD 14.9bn overall in 2021, while the annual deficit was at USD 35.5bn in 2020.
The deterioration in foreign trade data in January makes “surplus” expectations for 2022 increasingly impossible, especially considering the deficit, which was above the expectations in December. The DEFICIT WILL LIKELY INCREASE in the coming months due to the rise in energy imports.
These numbers will deteriorate when the Russia-Ukraine tension enters into this equation. The increase in energy prices will push imports even higher. We may also see a decrease in the export of some products. If the conflict persists, tourism will also deteriorate. For this reason, the best thing for the Turkish economy would be to restore the balance in the region as soon as possible.
A POSSIBLE NEW WAVE OF INFLATION?
We have seen the staggering effect of the jump in foreign exchange rates at the end of 2021 and price hikes on inflation in recent months. As long as foreign exchange rates remain at their current levels, this pressure will largely disappear by April. However, there have been signs that there may be a “re-rise” in exchange rates over the past two weeks. In this case, a new wave of CURRENCY˹RELATED INFLATION might occur by April. Sharp rises in agricultural, energy, and metal prices in the global markets in February further drove up inflation, even if the exchange rate remains stable. Perhaps the only positive development in terms of inflation is that the prices of some fruit and vegetable products likely fall domestically with the decrease in exports due to the Russia-Ukraine war.