Conjoncture

Turkey: ending the stop-and-go growth?

ECO CONJONCTURE  
N°1  
January 2021  
TURKEY: ENDING THE STOP-AND-GO GROWTH?  
Stéphane Colliac  
In third-quarter 2020, Turkish GDP had already returned to pre-Covid levels. Turkey’s economic recovery can be attributed to massive policy  
support – both fiscal and monetary –, which also involves risks. Inflation is significantly above 10%, and unlike many other emerging coun-  
tries, the current account swung into a deficit again, which triggered a sharp depreciation in the Turkish lira. Faced with rising tensions,  
President Erdogan voiced to change the direction of economic policy. It should now have two pillars: a more rigorous policy mix, with a  
monetary policy that targets a lower inflation rate and greater attractiveness for non-resident investors. If these factors are sustained in  
the long run, they should help reduce volatility and release the bottlenecks that have weighed on Turkish growth over the past five years.  
2
4 7  
THE GROWTH/RISK TURKEY:  
RATED  
MONETARY POLICY AND  
INFLATION: A DANGEROUS TRADE-OFF HAS DETERIO- QUO VADIS?  
LINK  
The bank  
for a changing  
world  
Eco Conjoncture n°1 // January 2021  
economic-research.bnpparibas.com  
2
TURKEY: ENDING THE STOP-AND-GO GROWTH?  
In third-quarter 2020, Turkish GDP had already returned to pre-Covid levels. Turkey’s economic recovery can be  
attributed to massive policy support – both fiscal and monetary –, which also involves risks. Inflation is significantly  
above 10%, and unlike many other emerging countries, the current account swung into a deficit again, which triggered  
a sharp depreciation in the Turkish lira. Faced with rising tensions, President Erdogan voiced to change the direction of  
economic policy. It should now have two pillars: a more rigorous policy mix, with a monetary policy that targets a lower  
inflation rate and greater attractiveness for non-resident investors. If these factors are sustained in the long run, they  
should help reduce volatility and release the bottlenecks that have weighed on Turkish growth over the past five years.  
As the year 2021 starts, it is once again time for Turkey to make some as well as credit. But this short window was soon over. In August,  
choices. For nearly the past eight years – ever since Chairman Bernanke the TRY began depreciating rapidly again and the policy mix had to  
hinted in May 2013 that the Fed would scale back its QE programme be tightened. The central bank raised its key rates in November, and  
Turkey has been plagued by major macroeconomic imbalances President Erdogan announced a new economic policy framework that  
inflation, external deficits and/or public deficits). Although they did not was designed to make Turkey more attractive for foreign investors.  
emerge all at once, these imbalances have worsened over the years, He also said Turkey would return to a more rules-based policy mix  
increasing the vulnerability of the Turkish economy. (although without being more specific).  
(
This paradigm shift is most clearly seen in the rapid depreciation But for how long? Do these announcements foreshadow a radically  
of the Turkish lira, with periods of overreactions around a general different model? In this paper, we will try to describe what Turkey could  
downward trend (see chart 1). Growth has been driven by a largely be like in the next decade, depending on whether or not these pledges  
accommodative monetary policy, but this came at a price: a lasting generate lasting structural change.  
surge in inflation in recent years, far above the levels seen in the first  
decade of this century.  
In the absence of change, the past situation can be the best predictor  
for the future. As we will see, the last decade has seen a shift from  
a rule-based philosophy towards a more complex strategy offering  
greater flexibility in terms of economic policy, but at the price of greater  
opacity and less regard for policy rules.  
TRY/EUR EXCHANGE RATE  
1
0
9
8
7
6
5
4
3
2
1
0
Monetary policy and inflation: a dangerous link  
The monetary policy framework is very representative of the  
discretionary nature of economic policy. For the past several decades,  
Turkey has been hit by chronically high inflation, which has only fallen  
below 5% for four months over the past forty years (5% was the inflation  
target during the inflation targeting period, which guided monetary  
policy in the early 2000s). Chronically high inflation has taken its toll  
on the functioning of the Turkish economy.  
Monetary policy has become increasingly heterodox  
over the past decade  
Two crises pushed the Turkish authorities to opt for a more discretionary  
economic policy. The first was the combination of the great global  
recession of 2008 and the ensuing Eurozone crisis, which led to a  
change in the monetary policy framework. The second was the 2016  
coup, which was followed by an easing of fiscal constraints (see below).  
0
7
08  
09  
10  
11  
12  
13  
14  
15  
16  
17  
18  
19  
20  
SOURCE: REFINITIV  
CHART 1  
Short-term adjustments had to be made on several occasions – in  
January 2014, August 2018 and November 2020 – through an abrupt  
tightening of monetary policy. The accelerated depreciation of the  
Turkish lira was fuelling both inflation expectations and gold imports,  
which strained the external deficit. Yet these bouts of adjustments did  
not result in another paradigm shift, and after a few months, monetary  
policy returned to its accommodative bias.  
In the first decade of the century, the monetary policy framework was  
reformed to have an inflation targeting scheme, a strategy that proved  
its worth as inflation fell very sharply during the period, to a low of  
6
.3% in 2009 (down from an average of 79% in the 1990s, see chart 2).  
Yet with the increased volatility of capital flows, Turkey was regularly  
exposed to liquidity restrictions, which led it to switch to a new mone-  
tary policy framework as of 2011.  
Over the same period, Turkey’s external deficit, which is structural,  
rarely vanished. Only the 2018 currency crisis forced Turkey to grow  
at a slower pace than its trading partners in 2019, bringing import  
growth more in line with exports growth. Even so, the current account  
deficit returned to high levels in 2020 (3.7% of GDP) due to the drop-off  
in tourism revenue.  
The new framework, which changed on 19 November 2020, was based  
on a broad interest rate corridor and discretionary liquidity manage-  
ment (which could change directions overnight, without the need for a  
monetary policy committee meeting) that drew to varying degrees on  
a variety of policy instruments (interest rates corridor). This led to an  
effective monetary policy rate (weighted average of the different ins-  
With the outbreak of Covid-19 in March 2020, the Turkish authorities truments used) which could diverge sharply from the main policy rate  
provided massive economic support, via fiscal and monetary policies (i.e. the central corridor rate).  
The bank  
for a changing  
world  
Eco Conjoncture n°1 // January 2021  
economic-research.bnpparibas.com  
3
The central bank also introduced a Reserve Options Mechanism (ROM).  
This mechanism can be used to require banks to hold a certain ratio of  
their reserve requirements for Turkish lira deposits in gold or foreign  
currency. The value of the ratio was able to change according to the  
central bank’s discretionary decisions. The central bank used the ROM  
to boost its foreign reserves (since these foreign currency holdings are  
included in it). This instrument is also countercyclical for banks, since  
required reserves in foreign currency are set aside during favourable  
periods and can be drawn on when foreign currency liquidity comes  
under pressure. In cases of highly volatile capital flows, the ROM  
covers the banks’ foreign currency liquidity needs to a certain extent,  
without requiring central bank support (it does not draw on its net  
foreign reserves, i.e. excluding ROM). This explains why Turkish banks  
accommodated the periods of highly volatile capital flows that Turkey  
experienced as of 2013, without too negative consequences. The  
ROM also helped gradually to decouple domestic credit fluctuations  
from capital flows, which clearly shows the new flexibility offered by  
this countercyclical mechanism (see chart 3), as in 2015, 2018 and  
especially 2020.  
AVERAGE ANNUAL INFLATION RATE (%)  
3
2
2
1
1
0
5
0
5
0
5
0
03  
04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20  
SOURCE: REFINITIV  
CHART 2  
This new system played a key role in maintaining Turkey’s economic  
growth at a time when other emerging countries dependent on capi-  
tal inflows, like Russia, Brazil and South Africa, were hit by an abrupt  
downturn in growth as of 2015-16.  
CREDIT GROWTH (Y/Y, %) VS. CAPITAL FLOWS, CUMULATED  
OVER 6 MONTHS (USD BN)  
7
6
5
4
3
2
1
0
0
0
0
0
0
0
0
Credit  
Capital flows  
Yet this strategy involved some risks. Less dependent on capital flows  
fickleness, credit growth was maintained at a very fast pace for a long  
time. As a result, non-financial private sector debt did not decline like it  
did in other countries. Inter-company lending also increased via longer  
days of sales outstanding (which were extended from 65 business days  
in 2007 to 76 days in 2019, according to Euler Hermes).  
Although volatile capital flows became less critical for banks, capi-  
tal inflows have not covered the current account deficit since 2014,  
which explains why the central bank’s foreign reserves are so low (see  
chart 4) and why the Turkish lira is under pressure. Clearly, capital  
inflows are still necessary, and apparently the government has finally  
decided that Turkey needs a new influx of them.  
-
-
-
10  
20  
30  
0
7
08 09 10 11 12 13 14 15 16 17 18 19 20  
SOURCE: REFINITIV  
CHART 3  
The link between TRY depreciation and inflation  
A monetary regime characterised by severe currency depreciation  
tends to favour the de facto dollarization of the economy. This means  
that economic agents tend to set their prices in foreign currencies,  
even for transactions in the local currency. In the extreme case of full,  
de facto dollarization, currency depreciation is carried over 1 for 1 to  
inflation. This makes it very hard to control inflation.  
CENTRAL BANK RESERVE ASSETS (USD BN)  
Foreign exchange  
Gold  
1
20  
00  
1
We have formulated a model that characterises the link between  
foreign prices expressed in the local currency (foreign prices in USD  
multiplied by the exchange rate, labelled f in the formula below) and  
domestic prices (p). We will use the following simplified formula (log-  
linearized, with the constant ln(µ)):  
8
6
4
2
0
0
0
0
0
p = ln(µ) + β f  
A statistical analysis shows that there is co-integration, which implies  
the use of an error-correction model to show the dynamics of the pass-  
through effect of foreign price increases on Turkish inflation over time.  
1
As Garcés-Diaz (2001) and Colliac (2006) , we used the following for-  
07  
08 09 10 11 12 13 14 15 16 17 18 19 20  
SOURCE: CENTRAL BANK  
mula:  
CHART 4  
dpt = Φ(pt-1 – βft-1 – α) + γdpt-1 + ζdft + εt  
1
Garcés-Diaz D. (2001), Determinacion del nivel de precios y la dinamica inflacionaria en México, Cemla, Monetaria, Vol. 24 n° 3, pp. 241-270  
Colliac S. (2006), Les conditions préalables à la dollarisation totale: application à l’Amérique Latine, thèse pour le doctorat ès sciences économiques, Université Montesquieu  
Bordeaux IV.  
The bank  
for a changing  
world  
Eco Conjoncture n°1 // January 2021  
economic-research.bnpparibas.com  
4
This formula can be used to measure both the intensity and rapidity these two periods: whereas in the 2000s, the impact is 1.1% after two  
of the pass-through effect by calculating the month-on-month impact months, it rises to 1.9% over the same period of time after 2013. This  
of an initial 10% increase in international prices expressed in TRY. The illustrates the greater rapidity in the adjustment of domestic prices  
coefficient ζ, attached to this initial shock dft gives the instantaneous expressed in lira. This more rapid increase has the potential to trigger a  
value of the pass-through effect. The long-term part of the equation new depreciation movement, which means that monetary policy loses  
pt-1 – βft-1 – α and past inflation dpt-1 add additional inflation as of part of its autonomy.  
month T+1, and will continue doing so in the following months until  
cumulative inflation reaches the value of coefficient β of the long-term  
relationship. The negative value of coefficient Φ associated with the  
long-term relationship guarantees convergence, which works for all of  
the time periods for which the extent of the price pass-through effect  
is estimated.  
CUMULATIVE PASS-THROUGH TO INFLATION IN % FOR A 10% DEPRECIATION  
IN THE EXCHANGE RATE, MONTH ON MONTH, FOR THE TWO PERIODS  
3
.0  
.5  
2003-12  
2013-20  
2
We define four periods (1980-89; 1990-2002; 2003-2012; and 2013-  
2
020). The first two ones can be characterised as decades of high  
2.0  
inflation and repeated currency crises. The third period is marked by  
sharp disinflation and corresponds to the period of inflation targeting.  
The fourth period starts with the Fed’s announcement of “tapering”,  
which was marked by less USD liquidity and by investors’ heightened  
sensitivity to the macroeconomic imbalances in the emerging countries.  
1.5  
1.0  
0.5  
With the exception of the period 2003-2012, when the Turkish lira  
became more stable (except during global crises), in all of these  
periods, TRY movements were predominant over those of international  
prices in USD in the formation of international pricing trends expressed  
in TRY. Currency depreciation began playing a wider role again in the  
last period.  
0.0  
CHART 5  
0
1
2
3
4
5
6
7
8
9
10  
11  
12  
SOURCE: REFINITIV, BNP PARIBAS  
The extent of the pass-through to inflation, which was unitary in the  
long-term, was very rapid in the first two decades under consideration.  
The average impact of the shock corresponds to the month in which at  
least half of the impact on inflation has materialised, i.e. 3 months in  
both decades (see table 1). Consequently, it was impossible for Turkey  
to have a monetary policy, since Turkish prices were responding fully  
and rapidly to any increase in foreign prices.  
The growth/risk trade-off has deteriorated  
There is not just one way to obtain growth. Yet the search for higher  
growth rates is often accompanied by bigger imbalances.  
Less and less growth  
Against the background of economic support policies and the risks they  
engender, Turkey has been able to foster significant growth. Yet the  
repeated shocks of 2016, 2018 and 2020 have taken their toll. The  
determinants of growth can be analysed to identify the shortfalls that  
led to a more boom-bust growth profile (see chart 6).  
In the 1990s, numerous emerging countries – but not Turkey – entered  
into a disinflation period, which was partially driven by smaller degrees  
of pass-through from depreciations. This trend did not reach Turkey  
until 2003. In the decade that followed, a 10% depreciation generated  
only 5.9% inflation in the end, with a longer transmission period: the  
average duration of the shock increased to 14 months.  
An accounting analysis of Turkish growth shows that it was based mainly  
2
on accumulation factors in the most recent decade (see chart 7). The  
investment ratio was maintained at a high level, enabling significant  
growth of the capital stock, which is one of the fundamental factors  
of long-term growth. Employment also rose strongly, reflecting an  
increase in the working-age population and a higher participation rate  
in the formal economy. Unsurprisingly, the accumulation of production  
factors slowed sharply towards the end of the period, first in 2019 (in  
the wake of the 2018 crisis) and then due to the Covid-19 pandemic.  
Starting in 2013, the situation began to deteriorate, not so much due  
to the total impact on inflation (6.2% for a depreciation of 10%) or the  
average duration of the shock (still 14 months), but to the higher initial  
impact. Chart 5 shows the cumulative impact of a 10% depreciation on  
DEGREE OF THE PASS-THROUGH FOR A 10% INCREASE  
IN FOREIGN PRICES ON INFLATION (%)  
Yet since 2013, growth has been obtained through “perspiration rather  
than inspiration”, to use Paul Krugman’s famous expression on Asian  
growth in the years that preceded the 1997-1998 crisis. In Turkey (as in  
Asia at the time) total factor productivity declined (see chart 8), despite  
growing investment in both physical and human capital.  
1
980-89  
2.0  
1900-2002 2003-2012 2013-2020  
Immediate  
2 months  
2.2  
9.3  
10.0  
3
0.5  
2.8  
5.9  
14  
0.9  
2.9  
6.2  
14  
One could assume that there is a causal link between the decline in total  
factor productivity and inflation. Although in the short term, inflation  
tends to follow nominal exchange rate changes, in the medium to long-  
term, the real exchange rate is the key determinant of competitiveness.  
In periods of high growth, this exchange rate tends to appreciate, but  
this is rather triggered by an accumulation of factors  
1
8.7  
Long-term  
9.9  
Average impact  
3
(
months)  
TABLE 1  
SOURCE: REFINITIV, BNP PARIBAS  
2 We use a Cobb-Douglas production function, a text book representation that links  
GDP with capital stock, employment and total factor productivity.  
The bank  
for a changing  
world  
Eco Conjoncture n°1 // January 2021  
economic-research.bnpparibas.com  
5
GDP GROWTH IN VOLUME (%)  
TOTAL FACTOR PRODUCTIVITY (100 = 2011)  
1
1
1
4
2
0
8
6
4
2
0
2
4
6
105  
100  
95  
90  
-
-
-
85  
80  
07  
08 09 10 11 12 13 14 15 16 17 18 19 20p 21p  
SOURCE: IMF, BNP PARIBAS  
01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19  
CHART 6  
CHART 8  
SOURCE: PENN WORLD TABLES, BNP PARIBAS  
ICOR: INCREMENTAL CAPITAL OUTPUT RATIO (POINTS OF INVESTMENT  
NEEDED TO OBTAIN 1 POINT OF GDP GROWTH)  
CAPITAL STOCK VS. EMPLOYMENT: ANNUAL GROWTH (%)  
8
9
Capital stock  
Employment  
7
6
5
4
3
2
1
0
8
7
6
5
4
3
2
1
0
1
2
-
-
01  
02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20  
SOURCE: PENN WORLD TABLES, BNP PARIBAS  
02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19  
CHART 9  
CHART 7  
SOURCE: IMF, BNP PARIBAS  
that creates scarcities (so inflation) than productivity gains. As a result, country does not need to import as much, and can even become a net  
the competitiveness deteriorates and the likelihood of a depreciation exporter (as in the Asian model, of which Vietnam is one of the most  
increases, favouring additional inflation pressures. The patterns of the recent examples to date). If a virtuous circle is not created, it is still  
exchange rate and inflation trigger price formation in foreign currency. possible to restore the external balance, albeit through a decline in  
imports, which hurts domestic growth by restricting domestic demand.  
When the investment rate is high but with low returns, it can also have  
This is what happened in Turkey after the exchange rate crisis of August  
the following implications:  
2
018.  
From a strictly accounting perspective, the marginal efficiency of ca-  
pital deteriorates: the incremental capital output ratio (ICOR) – i.e. the  
number of investment points necessary to reach 1 point of GDP growth  
Yet, capital was invested, and a lot of it. Between 2010 and 2018, in-  
vestment in construction grew at an annual rate of 10% in volume,  
vs 5.7% for machines and equipment. This predominance, inherent in  
labour-intensive growth models (with such components as residential  
and commercial real estate), might explain the decline observed in  
total factor productivity.  
is high. In recent years, ICOR has increased in Turkey (see chart 9).  
Yet the generated investment must be funded and some of which is  
debt-financed. At some point, higher debt may have an impact on the  
level of interest rates, which may imply less private investment in the  
future.  
At the same time, foreign direct investment diminished constantly over  
the past decade. It averaged only 25% of the current account deficit  
In the short term, it seems very unlikely that today’s investments will  
generate sufficient exports in the future to reabsorb the external de-  
ficit. Granted, it is normal for a country to import when it cannot pro-  
duce in sufficient quantity locally all of the goods it needs, particularly  
those with high value-added such as capital goods. When productivity  
increases, however, the skills of local companies also improve, and the  
(
and 15% in 2020), compared to 56% in the previous decade. Although  
Turkey continues to have a sizeable production base, including for fo-  
reign companies, the majority of these investments are relatively old,  
and recent investments are not high enough to increase visibly the  
capital stock.  
The bank  
for a changing  
world  
Eco Conjoncture n°1 // January 2021  
economic-research.bnpparibas.com  
6
FOREIGN DIRECT INVESTMENT (USD BN)  
CYCLICALLY-ADJUSTED FISCAL BALANCE, % OF POTENTIAL GDP  
20  
18  
16  
14  
12  
10  
8
6
4
2
0
0
2
4
-
-
-6  
-
8
-
-
10  
12  
01  
02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20  
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20  
CHART 10  
SOURCE: CENTRAL BANK  
CHART 11  
SOURCE: IMF  
Public finances: the new weak link?  
AVERAGE MATURITY OF DOMESTIC PUBLIC DEBT (YEARS)  
Until recently, fiscal policy was considered as a mitigation factor in  
terms of risk, with a low public debt ratio, notably due to its high  
nominal growth rate (even though the share attributable to inflation  
has increased over time). Clearly, a moderate public debt ratio was a  
favourable factor in early 2020, which made it easier to support the  
impact of the Covid-19 crisis on public debt.  
5
4
3
2
1
0
Yet fiscal policy had changed course as of 2016. The downturn in  
growth contributed to this policy change, but the deterioration in the  
fiscal balance was still striking, even after adjusting for cyclical factors  
(
see chart 11). As a result, the fiscal deficit could only be kept rather  
small for a few more years with the support of nominal GDP growth.  
When growth contracted, the fiscal overruns became fully apparent.  
A swelling public debt increased the interest expenditure (which is ex-  
pected to hit 3% of GDP in 2021), which is a handicap for future fiscal  
consolidation efforts. The debt profile has also deteriorated:  
12  
13  
14  
15  
16  
17  
18  
19  
20  
CHART 12  
SOURCE: TURKISH TREASURY  
The average maturity of public debt has shortened from 7 years in  
August 2018 to 5 years at year-end 2020, under the impact of the  
decline in the maturity of domestic debt from 4.2 years to 2.9 years  
(
see chart 12).  
BREAKDOWN BETWEEN COUNTERPARTY (“DEFAULT RISK”)  
AND CURRENCY RISK PREMIUMS (BASIS POINTS)  
The share of government debt in foreign currency has increased over  
the past decade (to nearly half), unlike most of the other big emerging  
countries, for which this share has diminished in recent years. In  
Turkey, the share of public debt in foreign currency has been bolstered  
in part by the depreciation of the Turkish lira (which increases the  
countervalue expressed in TRY).  
2500  
Currency risk  
Country risk  
2000  
1500  
1000  
The interest rate paid on public debt has increased, driven up by the  
increase in risk premiums, as illustrated in chart 13.  
With the growing volatility of the Turkish lira, currency risk became  
more significant and had an impact on all these three factors. In  
Turkey’s case, it played at the same time on the maturity of public debt  
and its share in foreign currency: the country had only limited capacity  
to take on long-term debt in its own currency, but it was able to choose  
between short term debt in TRY and long-term debt in foreign currency.  
Consequently, these risks went hand in hand. As a result, the TRY yield  
curve is incomplete and not very liquid beyond the average maturity of  
domestic debt (about 3 years). This is a handicap for monetary policy,  
5
00  
0
08  
CHART 13  
09  
10  
11  
12  
13  
14  
15  
16  
17  
18  
19  
20  
SOURCE: REFINITIV, BNP PARIBAS  
The bank  
for a changing  
world  
Eco Conjoncture n°1 // January 2021  
economic-research.bnpparibas.com  
7
which needs to be able to play on the term structure of interest rates  
to be fully effective.  
GDP TRAJECTORIES IN THE NEXT DECADE STARTING IN 2020  
(
LEVELS, BASIS 100 IN 2020)  
The increase in currency risk seems to be having a major impact on the  
interest expenditure, as shown by the breakdown of the premium on  
a 5-year government bond in TRY, compared to a USD Treasury bond  
with the same maturity. Currency risk has grown (risk premium on USD  
Turkish bonds compared to the equivalent in TRY), unlike the more  
limited role of counterparty risk (risk premium on USD Turkish bonds  
compared to the equivalent US government bond).  
Stop-go  
Gradualism  
1
80  
70  
1
160  
1
50  
40  
1
Moreover, based on recent trends in 5-year CDS premiums, part of the  
sovereign risk seems has been driven by the existence of a significant  
130  
3
currency risk . Particularly, when the percentage of debt in foreign  
1
20  
10  
currency increases default risk becomes more sensitive to swings  
in the exchange rate. The removal of the central bank governor on  
1
th  
November 7 foreshadowed the monetary policy decision of November  
100  
T = 0  
CHART 14  
T = N  
SOURCE: PENN WORLD TABLES, BNP PARIBAS  
1
9th, which was favourable for the stabilisation of the lira. After the  
removal, the default risk premium declined by 142 basis points (bp),  
even more than the currency risk premium (down 100 basis points on  
rd  
lated to the cycle. In this environment, productivity trends are closely  
related to the dynamics of the capacity utilisation rate: when capacity  
is underused, it is less productive, and vice versa. Given the boom-bust  
nature of growth, the composition of investment cannot be changed.  
November 23 ).  
Turkey: Quo Vadis?  
In economic policy, the policymaking process gives a meaningful idea And since Turkey is not up the value chain, the imports elasticity of  
of the objectives. There is abundant economic literature on the rela- growth remains high. As Aguiar and Gopinath (2007) indicate in their  
tive advantages between rules and discretion, notably following the analysis of emerging country growth in the 1990s, rather than a trend,  
emerging market crises in the 1990s, which favoured the adoption of we see a succession of short cycles that tend to drain away any real  
6
monetary and/or fiscal rules in the 2000s. But the paradigm changed tendencies (chart 14) , which is the pattern followed by Turkey in this  
with the relative success of the big emerging countries during the 2008 first approach.  
crisis: although activity declined, they were not hit by a financial crisis,  
Gradualism, in contrast, focuses on restoring an economic equilibrium  
nor did they need IMF financing. Greater resilience was then used to  
using a policy mix that tries to correct any imbalances. It results in  
justify foregoing certain pre-existing rules.  
a decline in growth in the years following the post-Covid rebound. In  
Turkey began to tolerate greater fluctuations in terms of inflation and other words, it tries to bring down the deficits and inflation, and even  
interest rates. Without returning to the extreme monetary fluctuations if it fails to do so in the very short term, the policy mix becomes more  
of the 1990s, economic cycles became more boom-bust: a ‘cold restrictive to make monetary conditions somewhat more neutral. The  
4
turkey’ approach , – based on abrupt (and reversible) monetary policy tightening of monetary policy implemented by central bank from No-  
adjustments – was preferred over gradualism. In practice, this resulted vember 2020 (with +675 bps rate hikes) may correspond to this strate-  
in several last minute, brutal key rate hikes of several hundred basis gy if it indicates a structural change to its reaction function to inflation  
points, each of which followed periods of low interest rates despite changes. It means that cyclical policy should provide less support, and  
high inflation. Using a more gradual approach coupled with a more it takes longer for the reforms accompanying the shift towards an eco-  
proactive monetary policy, interest rates would not have had to be so nomic equilibrium to have a positive impact on growth. Even so, the  
high to obtain a given level of inflation.  
reforms encourage greater foreign direct investment, which triggers  
an upturn in the growth of capital stock. A different type of financing  
to match a somewhat different type of investment, which sparks an  
upturn in productivity.  
Stop-go approach or gradualism, which will it be?  
When we compare two recent periods in Turkey, the decade 2003-2010  
provides a good example of gradualism while the decade 2011-2020  
reintroduced a dose of discretion, as policy consolidation decisions  
were less automatic. Using the same typology as we used for the deter-  
minants of economic growth, we see two possible growth trajectories  
Low differences can be seen between the two growth regimes over  
the next 5 years: for different reasons, they both engender an average  
annual growth rate similar to that of the previous five years (around  
3
% per year). Since the stop-go profile sparks changes that are not  
5
for the next decade .  
durable, the average annual growth rate is basically the same in the  
period 2026-30, due to a series of growth cycles that are rapidly inter-  
rupted. In contrast, gradualism fuels a virtuous circle in which growth  
is more stable and accelerates. Although this approach is accompanied  
by the return to a rules-based framework, for both monetary and fiscal  
policy, it also means the Turkish lira is much more likely to stabilise.  
The first approach uses the same patterns observed during the last  
years. It is characterised by a series of stop-and-go, with accumulation  
factors’ (labour and capital) growth increasing each time the economic  
situation stabilises, and declining when the next shock occurs. The in-  
vestment rate and the labour market participation rate are both corre-  
3
For more information, see Berg and Borensztein (2000), The Pros and Cons of Full Dollarization, IMF Working Paper n° 00/50; Garcia and Lowenkron (2005), Cousin risks: the  
extent and the causes of positive correlation between country and currency risks, Textos para discussão 507, Department of Economics PUC-Rio (Brazil).  
4
The expression “cold turkey” refers to an abrupt break with or withdrawal from a previous policy commitment, or in this case, a kind of shock treatment. It contrasts with  
gradualism, a strategy based on a gradual adaptation. See Giamattei (2015), Cold Turkey vs. Gradualism - Evidence on Disinflation Strategies from a Laboratory Experiment»  
Discussion Paper V-67-15, University of Passau.  
5
Growth is estimated over the next decade based on changes in capital stock, employment and total factor productivity using the Cobb Douglas function (estimated relationship  
between 1980 and 2017).  
Aguiar, Mark, and Gita Gopinath (2007), Emerging market business cycles: The cycle is the trend, Journal of Political Economy 115(1):69-102  
6
The bank  
for a changing  
world  
Eco Conjoncture n°1 // January 2021  
economic-research.bnpparibas.com  
8
In the early 2000s, gradualism resulted in a real appreciation of the Whichever growth regime prevails in the years ahead (stop-go or gra-  
lira, although admittedly, part must be attributed to productivity gains dualism) will make a difference in terms of the level and sustainability  
generated at the time. Moreover, this trend was accentuated by wides- of Turkey’s market outlets, as well as on the sector breakdown. Our  
pread capital flows that were favourable for the emerging countries. two policy patterns for the next decade illustrate two relatively diver-  
This would have to happen again in the future, as the low share of gent outlooks, although reality is of course more complex and will fall  
foreign investors (3% of public debt in November 2020) makes it easier somewhere in between the two.  
for them to become interested again provided policy is the right one.  
By perpetuating a boom-bust growth profile, and given the lack of ex-  
The resulting appreciation of the real exchange rate would generate a  
ternal financing in recent years, the stop-go scenario promises rela-  
disinflationary gain that would strengthen this better balanced growth  
tively mild and volatile import growth, with more limited development  
regime.  
of heavy investments. At the same time, household demand would  
keep pace with the erratic nature of the economic cycle. Under this  
Impact on market potential of the Turkish economy  
In recent speeches, President Erdogan has often repeated that one of  
framework, Turkey would remain an industrial powerhouse, protected  
from factory loss in part by the size of its domestic market. Even so,  
his top priorities is to boost the country’s attractiveness for foreign  
its market positioning would remain roughly the same, and the growth  
investors. In 2020, foreign direct investment probably fell to an all-  
of market outlets would mainly be concentrated in raw materials and  
time low (USD 3 bn). At the same time, the share of imports in the  
basic goods (mainly metals) used in industry.  
Turkish economy has fallen rather sharply over the past five years  
Gradualism offers a different model, one that promises a return to the  
(
even after excluding oil and precious metals), as industrial output  
stable growth of the 2000s built on a stable macroeconomic environ-  
ment. This would trigger a new wave of foreign investment attracted  
not only by stronger local growth, but also by a better performance  
of Turkey’s exports, facilitated by this model. Consequently, almost all  
sectors would benefit from this momentum, but with this difference:  
it would be easier to finance import growth, and the most capital in-  
tensive sectors, like capital goods, would become the biggest market  
outlet again.  
continued to grow (chart 15). The lira’s depreciation provided a strong  
incentive to substitute local inputs for imports. Yet this movement  
also strained the profitability of supply chains in industries that were  
heavily integrated internationally, introducing currency friction that  
did not exist for competing economies with more stable currencies.  
The clearest example is the automotive industry, where central Europe  
is now a serious competitor. On the whole, the degree of openness of  
the Turkish economy has declined.  
A different set of countries would see their market outlets grow in Tur-  
key depending on the trajectory that is followed. Under the stop-go sce-  
nario, there would be few big winners, with the exception of commodity  
exporting countries. Over the past two years, Russia has become the  
leading exporter to Turkey, in front of the former one (China). During  
the early 2000s and in 2010-2014, it was the world’s biggest manufac-  
tured goods exporters that posted the strongest growth (China, Ger-  
many, the US, Italy and France). A priori, these countries would be the  
main beneficiaries if the economy were to return to stable growth, with  
financing that is less stop-and-go. This would allow Turkey to resume  
investment in machinery and equipment, and all of these countries  
have corporates capable to provide these kinds of goods.  
The decline in imports also reflects the decline in the investment rate  
in the most capital-intensive sectors, such as capital goods. Of course,  
the boom-bust cyclical profile since the mid-2010s, and inflation’s ero-  
sion of household purchasing power, have also strained the cyclical  
sectors, including automobiles, metallurgy and plastics.  
Even so, regardless of the period (the 2000s, 2010-2014 or 2015-19),  
the current account balance has continued to show a deficit, even  
though it has narrowed over the past five years compared to the pre-  
vious 5-year period. The value of imports is still higher than that of  
exports: there has not been an upmarket shift. And yet this deficit has  
to be financed through capital inflows. This was the case through the  
mid-2010s, when demand continued to be financed through capital  
inflows. Thereafter, the lack of financing ended up draining the growth  
momentum.  
*
**  
The Turkish experiment and other examples show that the method  
plays a vital role in the capacity to change. The first scenario is based  
on shock treatment, with the risk that efforts will not be sustained. A  
stop-and-go approach to economic policy risks carrying over to growth,  
which could adopt the same profile. Reforms would not be sustained,  
and there would not be enough time to appreciate all their advantages.  
Using gradualism –a model that worked so well in the 2000s- would  
allow to get back on the road to sustained faster growth. Through ins-  
titutional changes that are made to last, gradualism fosters growth  
and limit inflation, which is necessary to generate more stable growth  
in the medium term.  
IMPORTS TO INDUSTRIAL OUTPUT, IN VOLUME (100 = 2010)  
1
05  
00  
1
9
9
8
8
7
7
6
6
5
0
5
0
5
0
5
0
Completed on 6 January 2021  
stephane.colliac@bnpparibas.com  
01  
02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19  
SOURCE: REFINITIV, BNP PARIBAS  
CHART 15  
The bank  
for a changing  
world  
GROUP ECONOMIC RESEARCH  
William De Vijlder  
Chef économiste  
+
33 1 55 77 47 31  
william.devijlder@bnpparibas.com  
ECONOMIES AVANCEES ET STATISTIQUES  
Hélène Baudchon  
France - Marché du travail  
Jean-Luc Proutat  
Responsable - Etats-Unis  
+
+
+
+
+
+
+
+
33 1 58 16 73 32  
33 1 58 16 03 63  
33 1 57 43 02 91  
33 1 43 16 95 52  
33 1 43 16 95 52  
33 1 55 77 71 89  
33 1 42 98 53 99  
33 1 43 16 95 56  
jeanluc.proutat@bnpparibas.com  
helene.baudchon@bnpparibas.com  
louis.boisset@bnpparibas.com  
Louis Boisset  
Banque centrale européenne, synthèses conjoncturelles zone euro, Japon  
Frédérique Cerisier  
Zone euro (gouvernance européenne et finances publiques)  
frederique.cerisier@bnpparibas.com  
hubert.debarochez@bnpparibas.com  
guillaume.a.derrien@bnpparibas.com  
raymond.vanderputten@bnpparibas.com  
tarik.rharrab@bnpparibas.com  
Hubert de Barochez  
Royaume-Uni, pays nordiques  
Guillaume Derrien  
Espagne, Portugal  
Raymond Van Der Putten  
Allemagne, Pays-Bas, Autriche, Suisse - Energie, climat - Projections  
Tarik Rharrab  
Statistiques  
ECONOMIE BANCAIRE  
Laurent Quignon  
Responsable  
+
33 1 42 98 56 54  
laurent.quignon@bnpparibas.com  
Laure Baquero  
Céline Choulet  
Thomas Humblot  
+33 1 43 16 95 50  
+33 1 43 16 95 54  
+33 1 40 14 30 77  
laure.baquero@bnpparibas.com  
celine.choulet@bnpparibas.com  
thomas.humblot@bnpparibas.com  
ECONOMIES EMERGENTES ET RISQUE PAYS  
François Faure  
Responsable, Argentine  
+
+
+
+
+
+
+
+
+
33 1 42 98 79 82  
33 1 42 98 56 27  
33 1 42 98 02 04  
33 1 42 98 26 77  
33 1 42 98 43 86  
33 1 43 16 95 51  
33 1 42 98 33 00  
33 1 42 98 74 26  
33 1 58 16 05 84  
francois.faure@bnpparibas.com  
christine.peltier@bnpparibas.com  
stephane.alby@bnpparibas.com  
stephane.colliac@bnpparibas.com  
perrine.guerin@bnpparibas.com  
pascal.devaux@bnpparibas.com  
helene.drouot@bnpparibas.com  
salim.hammad@bnpparibas.com  
johanna.melka@bnpparibas.com  
Christine Peltier  
Adjointe – Grande Chine, Vietnam, Afrique du Sud  
Stéphane Alby  
Afrique francophone  
Stéphane Colliac  
Turquie, Ukraine, Europe centrale  
Perrine Guerin, Sara Confalonieri  
Afrique lusophone et anglophone  
Pascal Devaux  
Moyen-Orient, Balkans  
Hélène Drouot  
Corée, Thaïlande, Philippines, Mexique, pays andins  
Salim Hammad  
Amérique latine  
Johanna Melka  
Inde, Asie du Sud, Russie, CEI  
CONTACT MEDIA  
Michel Bernardini  
+33 1 42 98 05 71  
michel.bernardini@bnpparibas.com  
The bank  
for a changing  
world  
GROUP ECONOMIC RESEARCH  
CONJONCTURE  
The information and opinions contained in this report have been obtained from, or are based on,  
public sources believed to be reliable, but no representation or warranty, express or implied, is  
made that such information is accurate, complete or up to date and it should not be relied upon  
as such. This report does not constitute an offer or solicitation to buy or sell any securities or  
other investment. It does not constitute investment advice, nor financial research or analysis.  
Information and opinions contained in the report are not to be relied upon as authoritative or  
taken in substitution for the exercise of judgement by any recipient; they are subject to change  
without notice and not intended to provide the sole basis of any evaluation of the instruments  
discussed herein. Any reference to past performance should not be taken as an indication of  
future performance. To the fullest extent permitted by law, no BNP Paribas group company ac-  
cepts any liability whatsoever (including in negligence) for any direct or consequential loss ari-  
sing from any use of or reliance on material contained in this report. All estimates and opinions  
included in this report are made as of the date of this report. Unless otherwise indicated in this  
report there is no intention to update this report. BNP Paribas SA and its affiliates (collectively  
Structural or in news flow, two issues  
analysed in depth  
EMERGING  
Analyses and forecasts for a selection of  
emerging economies  
PERSPECTIVES  
“BNP Paribas”) may make a market in, or may, as principal or agent, buy or sell securities of any  
issuer or person mentioned in this report or derivatives thereon. BNP Paribas may have a finan-  
cial interest in any issuer or person mentioned in this report, including a long or short position  
in their securities and/or options, futures or other derivative instruments based thereon. Prices,  
yields and other similar information included in this report are included for information pur-  
poses. Numerous factors will affect market pricing and there is no certainty that transactions  
could be executed at these prices. BNP Paribas, including its officers and employees may serve  
or have served as an officer, director or in an advisory capacity for any person mentioned in  
this report. BNP Paribas may, from time to time, solicit, perform or have performed investment  
banking, underwriting or other services (including acting as adviser, manager, underwriter or  
lender) within the last 12 months for any person referred to in this report. BNP Paribas may  
be a party to an agreement with any person relating to the production of this report. BNP Pa-  
ribas, may to the extent permitted by law, have acted upon or used the information contained  
herein, or the research or analysis on which it was based, before its publication. BNP Paribas  
may receive or intend to seek compensation for investment banking services in the next three  
months from or in relation to any person mentioned in this report. Any person mentioned in  
this report may have been provided with sections of this report prior to its publication in order  
to verify its factual accuracy.  
Analyses and forecasts for the main countries,  
emerging or developed  
ECOFLASH  
Data releases, major economic events. Our  
detailed views…  
ECOWEEK  
Weekly economic news and much more…  
BNP Paribas is incorporated in France with limited liability. Registered Office 16 Boulevard des  
Italiens, 75009 Paris. This report was produced by a BNP Paribas group company. This report is  
for the use of intended recipients and may not be reproduced (in whole or in part) or delivered  
or transmitted to any other person without the prior written consent of BNP Paribas. By accep-  
ting this document you agree to be bound by the foregoing limitations.  
ECOTV  
Certain countries within the European Economic Area:  
In this monthly web TV, our economists make  
sense of economic news  
This report has been approved for publication in the United Kingdom by BNP Paribas London  
Branch. BNP Paribas London Branch is authorised and supervised by the Autorité de Contrôle  
Prudentiel and authorised and subject to limited regulation by the Financial Services Authority.  
Details of the extent of our authorisation and regulation by the Financial Services Authority are  
available from us on request.  
This report has been approved for publication in France by BNP Paribas SA. BNP Paribas SA  
is incorporated in France with Limited Liability and is authorised by the Autorité de Contrôle  
Prudentiel (ACP) and regulated by the Autorité des Marchés Financiers (AMF). Its head office is  
ECOTV WEEK  
What is the main event this week? The answer  
is in your two minutes of economy  
16, boulevard des Italiens 75009 Paris, France.  
This report is being distributed in Germany either by BNP Paribas London Branch or by BNP Pa-  
ribas Niederlassung Frankfurt am Main, a branch of BNP Paribas S.A. whose head office is in Pa-  
ris, France. BNP Paribas S.A. – Niederlassung Frankfurt am Main, Europa Allee 12, 60327 Frank-  
furt is authorised and supervised by the Autorité de Contrôle Prudentiel and it is authorised and  
subject to limited regulation by the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin).  
United States: This report is being distributed to US persons by BNP Paribas Securities Corp.,  
or by a subsidiary or affiliate of BNP Paribas that is not registered as a US broker-dealer. BNP  
Paribas Securities Corp., a subsidiary of BNP Paribas, is a broker-dealer registered with the U.S.  
Securities and Exchange Commission and a member of the Financial Industry Regulatory Autho-  
rity and other principal exchanges. BNP Paribas Securities Corp. accepts responsibility for the  
content of a report prepared by another non-U.S. affiliate only when distributed to U.S. persons  
by BNP Paribas Securities Corp.  
MACROWAVES  
The economic podcasts  
Japan: This report is being distributed in Japan by BNP Paribas Securities (Japan) Limited or by  
a subsidiary or affiliate of BNP Paribas not registered as a financial instruments firm in Japan,  
to certain financial institutions defined by article 17-3, item 1 of the Financial Instruments and  
Exchange Law Enforcement Order. BNP Paribas Securities (Japan) Limited is a financial instru-  
ments firm registered according to the Financial Instruments and Exchange Law of Japan and  
a member of the Japan Securities Dealers Association and the Financial Futures Association of  
Japan. BNP Paribas Securities (Japan) Limited accepts responsibility for the content of a report  
prepared by another non-Japan affiliate only when distributed to Japanese based firms by BNP  
Paribas Securities (Japan) Limited. Some of the foreign securities stated on this report are not  
disclosed according to the Financial Instruments and Exchange Law of Japan.  
Hong Kong: This report is being distributed in Hong Kong by BNP Paribas Hong Kong Branch,  
a branch of BNP Paribas whose head office is in Paris, France. BNP Paribas Hong Kong Branch  
is registered as a Licensed Bank under the Banking Ordinance and regulated by the Hong Kong  
Monetary Authority. BNP Paribas Hong Kong Branch is also a Registered Institution regulated  
by the Securities and Futures Commission for the conduct of Regulated Activity Types 1, 4 and 6  
under the Securities and Futures Ordinance.  
ET  
voir la page twitter des études économiques  
Some or all the information reported in this document may already have been published on  
https://globalmarkets.bnpparibas.com  
©
BNP Paribas (2015). All rights reserved.  
Bulletin édité par les Etudes Economiques – BNP PARIBAS  
Internet : www.group.bnpparibas.com - www.economic-research.bnpparibas.com  
Directeur de la publication : Jean Lemierre / Rédacteur en chef : William De Vijlder  
The bank  
for a changing  
world  
QUI SOMMES-NOUS ? Trois équipes d'économistes (économies OCDE, économies émergentes et risque pays, économie bancaire) forment la Direction des Etudes Economiques de BNP Paribas.
Ce site présente leurs analyses.
Le site contient 2732 articles et 723 vidéos