EcoTV Week

Turkey: on the razor's edge

07/22/2022

Turkey's economic situation continues to offer a stark contrast, with resilient growth on one hand and soaring inflation, dwindling foreign exchange reserves and a depreciating lira on the other. In short, the reed bends but does not break. Some explanations in this new issue of Eco TV Week.

Transcript

The economic situation in Turkey
is always very contrasted. On one hand, a resisting growth and on the other hand, a rising inflation, reducing foreign reserves and a depreciating lira.The reed bends but does not break. Let me provide explanations in this new edition of Eco TV week.

In a previous edition, at the beginning of the year, we mentioned the peculiar
economic situation in Turkey. It is still the case. Growth still resists. It was plus 1.2% in the first quarter compared to the previous quarter. At the same time, inflationhas continued to accelerate, 5.1% per month on average between February and June, to reach a peak of 78.6% yoy. Other estimates even mention a triple digit inflation rate. In parallel, foreign reserves have decreased by approximately 28 billion dollars since late November due to the rising energy bills and portfolio investments outflows. The lira has depreciated by approximately 20% against a euro-dollar basket.

But business confidence remained at a high level even though it has declined since November. The views of industrial actors on export order books are well above their historical average. Turkish companies are strengthening their competitiveness on external markets. Besides, excluding energy bills and gold imports, the current account balance remained largely positive. More strikingly, the balance of opinions on investment and recruiting intentions kept increasing till June. Surely, Turkish companies do see the costs of raw materials and of intermediate consumption rise but they also benefit from negative real interest rates which prompt them to invest.

On the contrary, household confidence collapsed due to the acceleration of inflation and despite labour market improvement. Households saw their purchasing power decline despite the minimum wage valorisation which occurred at the beginning of the year. But it only partially compensated for past inflation. Besides, credit card outstandings and instalment credits, which are usually used to cover unforeseen expenditure or to make ends meet, have reaccelerated since April. In short, inflation exacerbates households budget constraints.

The burden of inflation that weighs on people led recently the government to adopt a massive supplementary budget, 50 billion dollars, which, at the prevailing exchange rate, represents 6.5% of GDP. The expenditure relates to personnel costs, social transfers but also to subsidies to gas and coal importers in order to limit the increase in energy costs for consumers. The government uses its budgetary leeway that comes from the increase in tax revenues - excluding interest costs, the budgetary balance is positive - and costs of borrowing in real terms which are even more negative than for companies.

But it is more and more difficult to find a true balance. On one hand, the government sticks to a very accommodative monetary policy and competitive exchange rates in order to favour investment, exports and to encourage import substitution. They will now use the budgetary lever to diminish the economic cost of inflation. But on the other hand, monetary authorities are forced to strengthen the rules of credit distribution both in terms of quantity and quality. They are also forced to strengthen coercive measures to stop the erosion of foreign reserves. Among these measures, the obligation imposed on exporters to repatriate 40% of their foreign exchange revenues. That's all for now.

Thanks for watching.
See you soon for another edition.

THE ECONOMISTS WHO PARTICIPATED IN THIS ARTICLE