Turkey Macro Review (October)

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marc's picture

The Turkish minister recently announced that Turkish economy will fail to accomplish its targeted 4% economic growth rate for 2012. Unofficially, growth forecast are down to between 3 and 4 percent now. However, contrary to what the Turkish Finance Minister Zafer Caglayan declared, things could be worse than that: there are chances that Turkey might not reach (or barely reach) a 3% in 2012Q4.

Macrodynamics and Economic Growth

Considering that the average of the highly volatile Turkish economic growth rate over the past 10 years is 4.4%, Turkey experienced a constant slowdown throughout 2012. Key drags here are private consumption, exposure to the global macroeconomic condition and investment.

An exposure to global macro-conditions in Turkey is not recent phenomena.The correlation between GDP variations of Turkey main trading partners and Turkey GDP is actually stronger than what one would think at first. As the IMF and various analysts at prestigious equity research departments of Investment Banks and even the World Trade Organization continue preparing and cutting global forecasts for 2013, we believe Turkey will not be the exception. Unfortunately, for Turkey, if global macrocondtions –specially EU macroconditions- are fragile, the economy gets fragile. Unemployment is likely to remain high as approximately 900,000 young adults prepare to enter the workforce next year. The current account is really burdened with an enormous trade deficit. Currency depreciation has been used, with or without knowledge of cause, to increase competitiveness in exports during the last years buth this has caused the fiscal position to deteriorate further. It also did not help to the trading volume of Turkish economy.

Both export and import growth have decreased; though slowdown in imports has been more pronounced. The continuation of highly unsustainable levels of stimulus spending together with reductions in tax revenues due to the cancellation and slow down of many economic activities will likely continue through 2013, and the current account deficit might not be solved in the short to medium run. However, we ought to emphasize that current account deficits are primary driven by private sector, rather than public. With a currency kept artificially tight to preserve stability and reduce inflation and trade deficits and a serious deficit, we believe the government lacks of enough policy bullets to truly achieve a 3% targeted economic growth rate for 2013.

The Chart


2012 total

2013 (forecast)

Economic growth (%, y/y)

3.1% (Q3 was 2.9%)





Policy Rate



Monetary Policy: What you need to know
1. Policy rate remains unchanged at 5.7 percent. Parallel to the lowering of the upper end, the interest rate of primary dealer banks also reduced from 11 percent to 9.5 percent.

2. At the center of the monetary tools of the Central Bank of Turkey (CBT) is the ROC mechanism. This mechanism is not new in theory, several authors and even a famous paper have explained it well. But the terminology is somewhat new, apparently only the CBT calls it ROC. By this mechanism, banksthat make external borrowings should accumulate reserves. Such reserves are added to the gross reserves of the CBT (from the CBT it is a liability to banks). Due to this mechanism, CBT gross reserves consist of approximately 109.7 bn USD dollars, including 16 bn in gold.

3. Volatility in the forex market has dimished recently, due to the ROC mechanism.

4. According to the last declarations of CBT, there is no need to conduct monetary injection in the short run.

5. The CBT did not revise policy rate at 5.75% in this last meeting. CBT might consider revising it in far severe cases, for example, if inflation falls below 5.75% when the outlook shos it will go down below 5%. or if the EZ crisis deteriorates further.

6. Turkish CBT is the first in the world to apply ROC, according to official declarations.

7. Interbank rates are currently around 5% (rough approximate).


- Turkey economy is highly dependent on external financing.
- Turkey current account deficit
- Contrary to what some official press releases might be indicated, Turkish monetary policy is not tight.

Sensitivity Analysis - Turkey and EU
A 1% contraction in European economy lowers Turkey growth by 1%.


Turkish Economy expert Emre Deliveli on the recent Turkish macro trends (highly both informative and satirical):

CITI Group Turkey Macro Flash:

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adrian's picture

We keep most of our views regarding Turkish economy for 2013, as for March 5th. Actually, we expect a 4% economic growth rate for 2013 (y/y). Investment still remains well below its true potential but on the good side we have good prospects for gold production for 2013, which could help boost net exports, and in a highly bullish case, make Turkey break the 4% :)