Dollars, deficits and hereafter
Now what? Only municipal elections are ahead, and they are due in March 2019. ‘Muddling through’ won’t do because there are still 9 months to go. I tend to think the lira is monetarily around a steady state, but this is not equilibrium. There are at least three major problems that need to be addressed urgently. First, loans are now growing at a very slow pace. Ordinarily, loan growth exceeds local funding growth, but not this time. This means overseas funding doesn’t come to the rescue for many a reason. It is expensive given that bank bills and corporate bonds carry 9-10 percent USD rates. Add to this swap costs and it will be easy to see how expensive loan rates are, and are bound to be so because cost of capital is high, both equity and debt. Theoretically, if there will be a rush to lending then a competition for scarce deposits has to take place, which will push TRY deposit rates further. This may be happening as we speak. We are referring to public banks of course because private banks have refrained from joining the party.
Loans and interest rates
The latest data shows total loans grew by 15.1 percent annually while public banks’ lending stands at 27.4 percent. Private banks’ loan growth is a mere 8.4 percent according to the FX-adjusted 13-weeks moving average, annualized. By the same metric, public banks began the year with 15.3 percent growth, which subsequently went up to 27.4 percent whereas private banks were lending at a pace of 11.7 percent in the beginning of the year. Consumer loans and credit cards are now growing by 13.6 percent annually whereas they started the year with 17.6 percent. This is clearly a function of the fact that credit growth moves very closely with local deposit growth. In other words, overseas funding doesn’t make a positive contribution. In the past, the situation was entirely different. In the new market environment, either deposits will be attracted via high deposit rates, in which case the lending rate will be even higher, or loan growth will remain subdued. With inflation expected to peak at a minimum of 15 percent – that is if domestic demand is curtailed in the second half - around 20 percent loan growth is warranted if GDP is to reach its potential, i.e. in the range of 5 percent. Furthermore, TRY deposits fall and FX deposits rise. In fact, mortgage rates have already begun to rise and even public banks now declare rates bordering 1.50 percent per month. Private banks’ mortgage rates vary between 1.63 percent and 1.95 percent. Because costs are increasing, this is only natural. However, at those rates mortgage loans can’t pick up. The 0.98 percent campaign has brought some relief, but it seems that’s about it. Low rates aren’t (weren’t) sustainable as such. Since public sector deposits in accounts with the CBRT are also low, both in FX and TRY components, it is hard to imagine a liquidity stemming injection from that.
Fore gn trade
Second, trade deficit and export/import indicators depict a pattern. Export growth rates are falling and now import growth rates are also falling. This is so despite the fact that exports and imports are rising on an annual basis; in May exports grew by 5.3 percent whereas imports by 5.5 percent. The trade deficit widened as a result. However, we have to consider two statistics here and they are more important than the head-on figures. First, the deficit is due to energy imports, which rose from $35 billion to $35.9 billion month-onmonth in cumulative terms whereas the non-energy-non-gold deficit fell for the first time since August 2017. Second, if we look at it that way, exports went up by 10.3 percent while imports by only 5.5 percent year-onyear. Working day- and seasonally-adjusted data also reveal a slight increase in exports relative to imports. In June, the Turkish Exporters’ Assembly posted a 5 percent export increase. In H1 2018 the rise in exports has been 7.4 percent vis-àvis H1 2017. The annual rise is 9.7 percent and exports reached $161.5 billion. Automotive is again leading the way. In fact, we do see a significant tendency for imports to fall and export/import annual growth rates now converge. This is indicative of a slowdown because we don’t expect net exports to contribute to GDP this year. Thus far, it is entirely domestic demand-driven. In a ‘cooling off ’ economy one shouldn’t anticipate an inordinately large current ac-
count deficit. In fact, the trade deficit doesn’t widen as a result of an import boom but because the energy bill still goes up and the gold trade enhances the deficit. These are noncore developments, so to speak. I see that as a neutral event as regards TRY stability going forward.
In the aftermath of the elections the lira has positively decoupled from EM currencies and appreciated by 1.86 percent against the USD. The USD/TRY exchange rate stood at 3.77 at the beginning of the year, depreciated sharply in May and peaked at 4.92 on May 23. There were issues related to confidence and also international factors such as the rising Dollar Index, CDS and swap costs, expatriation of some cross-border funds etc. The FX debt of local firms also played a role. All in all, the depreciation was rather steep, and I don’t think above 3.80 is likely in the short-run. There is kind of a credit opened by international markets after the elections and the market hopes that the composition of the new cabinet will appease their worries. The Argentinian Peso, the Brazilian Real and the Chilean Peso lost value by 7 percent, 2.4 percent and 2.5 percent respectively over the span of a week. The structural problems remain of course, but there is now a distinct possibility that the worst is over. Notwithstanding high short-run hopes, what is to be done will have to be done. In fact, there are signs that the municipal elections can be held ahead of schedule later this year instead of in March 2019. This is a good omen given electoral logic because radical reforms are almost never implemented before the elections. The sooner the better from an economic vantage point. My opinion is clear: there are very serious problems but in the shortrun the lira may not depreciate further because it is already ‘oversold’. Whether it might appreciate a bit is an open question. It might because ‘overheating’ is no more, the trade and current account deficit outlooks don’t promise any surprise, and all interest rates are high. Should confidence be restored fully, the problem won’t be whether such rates could defend the currency so to speak but whether they will stifle the real economy to a very large extent or not.
Possibly in a week or so, the economic team will be revealed to the public we will be able to get a taste of what may happen. Then, I would venture that there will be an all-in package aiming at restoring balances. It will certainly involve an attempt at soft landing, and interest rates will remain high. Inflation will peak at around 15 percent this summer, barring any further currency shock. In Q2 2018, we may possibly witness 6 percent GDP growth but the year-end print will depend on H2. If local elections are to be held in November, then 5 percent 2018 GDP growth is likely because some kind of ‘muddling through’ may go on for some months. After the local elections, however, the path is open and there will be no elections for the next five years. This is indeed a novelty given that there have been so many referenda, general elections, local elections and presidential elections over the last decade that almost each year there was a political event on average. Now that there will be nothing left, the time for structural adjustment may finally have come.
‘The Ottoman-Turk sh Const tut onal Journey’ may have neared ts end
A historical aperçu may serve a purpose here, because there has been a sea-change and now there is kind of a presidential system here. The traditional ways of waging politics won’t disappear all of a sudden, but the sea-change is genuine. The saga effectively began more than a hundred years ago, and many of the political facets that now covet the landscape were already extant back then albeit in different concrete forms.
In fact, the Ottoman administration had already garnered quite a few successes after 1839 – and 1876 - in shedding its early modern facets and had become a sufficiently modern, if not fully westernized, government apparatus. As such, it was much more sophisticated than, and different from, the caricatured forms it was portrayed as to western laymen. Still, the “Republican Moment” might have come as a surprise to many an observer although records underscore the existence of a publicly open process of hints, leading indicators and debates regarding the advent of the Republic. It is also true, however, that in the early phases of the nascent independence movement such bold thoughts were not that unscrupulously conveyed to the people at large.
That republican moment would soon be topped by many reforms that explicitly aimed at endowing it with flesh and blood. The nascent Republic increasingly refrained from referring to religion qua a constitutional element of its identity. A hagiography of this period should prove to be illuminating in its own right, but it suffices to say that circa 1930, the image of the Turk in the eyes of the constitutive and ruling elite had almost nothing in common with the image they themselves had nurtured back in the early 1900s.
Neither unique nor sui generis as it may, the Kemalist revolution nonetheless contained numerous tokens of a new departure in it. Now also there exist numerous tokens of a new departure. What kind of political economy the new departure envisions will be rendered through deeds and words within a couple of months.