Industry shrinks as domestic demand falls

Mustafa Sönmez – Hürriyet Daily News, April/13/2015

 The growth data of 2014 released on the last day of March and preliminary indicators released for the first three months of 2015 show that there is a serious slowing trend in the manufacturing industry, which is considered the backbone of the economy. When industry slows down, the service sector also loses speed, starting with commerce and finance. The reason why the manufacturing industry is sounding the alarm has to be analyzed carefully and where it lies has to be found to accelerate growth again.

In the period between 2003 and 2007, Turkey’s economy was growing at an average of 7 percent annually and the manufacturing industry was living its best years, it too growing at the same rate. However, with the global crises that came later it shrank in 2008 and 2009. In 2010 and 2011 it grew at an average of 12 percent, then came the recession years. Growth in the manufacturing industry went down to 1.7 percent in 2012 and stayed at 3.7 percent in the following two years.

Based on domestic demand 

The reason the economy in general and industry in particular and its backbone the manufacturing industry have come to a bottleneck is because it has been designed for domestic demand and the exportation leg of it has been neglected.

Source: TÜİK
When the growth rates are analyzed for the 2003-2014 period of the Justice and Development Party (AKP) governments, the average annual growth rate was 4.8 percent, with 3.3 points of this coming from household consumer spending while 1.6 points were investments and 0.7 points came from public spending. Foreign trade on the other hand did not have any positive contribution to growth in this period; it even pulled it down half-a-point.

When growth rates in the manufacturing industry and household consumer spending rates are compared, it can be observed that there is a major overlap.
The average growth rate of the period between 1999 and 2014 for
untitledthe manufacturing industry was 4.1 percent, and for expenditures of households, it was 3.8 percent. This shows the dominant role of domestic demand in the growth and shrinkage of the manufacturing industry. Especially in the period between 2000 and 2008, the rates were quite close. In the 2010 to 2014 period, the growth rate in manufacturing industry reached 6.6 percent, whereas household spending remained at 4.1 percent. With the decline in consumption, the manufacturing industry was observed to have lost wind.

Personal loans

In the acceleration of household expenditures, which carries wind to the manufacturing industry, consumer loans and credit card payments, in other words personal loans, have a principal place. With the rise in 2003 of external capital inflow which corresponded to an annual average of $40 billion, credit volume banks provided for the consumer and commerce segments, to small and medium-sized enterprises (SMEs), rapidly increased.  The credit volume which was 102 billion liras in current prices in 2004 reached 1.257 trillion liras in 2014, a rise of 1132 percent. In the same period the increase in the consumer price index (CPI) was 142 percent, telling us that the credit volume had increased extraordinarily.

Out of the 102 billion liras in loans the banking sector provided in 2004, 26 billion liras were personal loans. In other words, they were the consumer loans on vehicle, house and personal finance credits as well as other loans over credit cards. This amount kept its share in following years among total loans and as the average of the period of 2004-2014, the share of personal loans in total loans reached 31 percent.

With the effect of the interest rate rises in 2014, personal loan usage declined. The total amount of personal loan stock of 354 billion liras constituted 28 percent of total loans. In 2014, it can be seen that personal loan usage increased 7.2 percent in current prices but stayed 1 point behind CPI, showing a real decline. A withdrawal was observed, especially in vehicle and credit card loans.

Credit card debtors started preferring consumer loans because their interest rate was lower, but as a whole, personal loan usage declined. This lowered household consumption; the decreased demand created a slowing effect on the wheels of the manufacturing industry.

2015 also negative

While growth in 2014, and as a sub-branch of it, the growth in general industry and the manufacturing industry, was lower than the target, there also has not been a good start for 2015. Data released for the first quarter of 2015 points to zero or below zero growth. The main indicators that strengthened this estimate are the following:

The Industry Production Index declined for the first time in the past four years in January. In January, seasonally and calendar-adjusted industry production fell 1.4 percent compared to the previous month. Production on a monthly basis fell 7.4 percent in mining and 1.4 percent in manufacturing.

One other negative indicator is about turnovers. In January, the Industrial Turnover Index seasonally-adjusted lost almost 5 percent compared to December 2014. The capacity usage rate in the manufacturing industry, on the other hand, went down 0.4 points compared to the previous month and 0.7 points compared to March 2014, falling to 72.4 percent. From all this data, it can be understood that industry is losing power and does not give much hope in terms of growth in the first quarter of 2015.

There was no change in the external demand to compensate for the shrinkage in domestic demand. While exportation fell 3.4 percent in the first two months of 2015, imports also, with the effect of decreased investments and production, fell 10.6 percent. The Turkish Exporters Assembly (TİM) announced that the fall in exports in March was 13.34 percent. Also, this data increases the possibility that the growth data to be released by Turkish Statistical Institute (TÜİK) on June 10 will show a negative figure.

Global developments

First quarter data confirms that the year 2015 will also be a tough year in the global economy. In 2014, China’s growth rate was 7.4 percent, the lowest in 25 years. A recovery in the eurozone economies is hoped to arrive with the monetary expansion program.

The foreign resource inflow, which decreased at a rate of one-third in 2014, continued to decrease in the first quarter of 2015. This pushed the dollar exchange rate upward as well as postponed a climate suitable for investments and interest rate cuts. It also caused rises in costs and increased prices.

Income generating policies

The fact that 2015 is a general election year has made several domestic and international investors go into “wait and see” mode. The AKP government not being able to find a solution to the stagnation of the past three years has triggered the argument that “A new story for growth is needed,” but this expectation has not been reciprocated yet.

If in the short term, with a recovery in low and medium income segments’ incomes, an increase in demand is created then an extreme shrinking of the economy can be prevented. This requires that a portion of the budget expenditures be used to increase the salaries of civil servants and the retired so that household spending increases. This is possible by lowering defense-security and bureaucracy expenditures and with more justice in taxation.

However, instead of this method, the government seems to have chosen populist measures, such as to using the Unemployment Fund resources which have reached 85 billion liras, to influence voter preferences. This is both wasting the fund and wasting time on policies that have no contribution to growth. These kind of voter-focused policies do not solve the problem; they just inflate the bill that is to be sent to society in the future.

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Turkish business world in panic over contraction in economic growth

Mustafa Sönmez – Hürriyet Daily News- April/6/2015

“If the GDP growth slows down in the first quarter and a significant recovery cannot be maintained in the following quarters, 2015 will be a year during which Turkey grows below its potential. This really matters, as we all know. The GDP growth has been slowing down since 2011 and the country has already been growing under its real potential. I call this ‘the inability to grow,’” said one of Turkey’s most prominent economists, Prof. Taner Berksoy, in his April 1 column in the Turkish daily Dünya.
This “inability to grow,” in Berksoy’s terms, has caused a feeling of panic among businesspeople, especially when they saw the GDP growth data for 2014…

Targets could not be met in 2014

The Turkish Statistical Institute (TÜİK) announced the GDP growth rate for 2014 as 2.9 percent upon fixed prices on March 31. The GDP grew 2.6 percent in the last quarter of 2014, according to the TÜİK data. There was some shrinkage in the added value of the agricultural sector at around 2 percent and in total investments at around 1.3 percent. Industrial production grew by 3.5 percent and the services sector by 4 percent in 2014.

The national income contracted by some $23 billion in 2014. Turkey’s national income, thus, decreased to $800 billion and the income per-capita by $418 with the latest updates. The income per capita fell to around $10,404 in 2014, compared to $10,822 in 2013.

While investments upon fixed prices fell by 1.3 percent in 2014, household consumption expenditures rose by 1.3 percent. Some 1.9 percent of the 2.9 percent of the GDP growth came from the rise in exports. However, exports were not enough to boost the growth rate in a year when the U.S. dollar gained over 15 percent value against the Turkish Lira.

The growth target, which had been set at 4 percent earlier, was revised to 3.3 percent in mid-2014, but the real rate was announced even below the revised target.

HDN

Shrinkage in 2015

The 2014 growth rates were far from being satisfactory. What about 2015? In the medium-term economic program, the growth target was set at 4 percent for 2015. Some zero growth is, however, expected in the first quarter of 2015.

Fresh data from the TÜİK has shown the country’s foreign trade deficit narrowed by 10 percent in February from the same month of the previous year, but the data does not point to an improvement since it was engineered by a drop in imports rather than an increase in foreign sales.
Turkey grew lower than 3 percent in the last three years and business circles are concerned about the process, urging Turkey to write a new growth story.

Key warnings from TOBB head

Union of Chambers and Commodity Exchanges (TOBB) head Rifat Hisarcıklıoğlu made key warnings about the economy and said the GDP growth had been slowing down recently, but the current account gap had increased for the last few years.

He said the current account gap-to-GDP averaged 4.5 percent between 2003 and 2007, with a GDP growth rate at around 6.9 percent. Although the former figure increased to 7.1 percent between 2010 and 2014, the GDP growth average decreased to 5.4 percent, he said.

“We have fallen into the middle income trap. Our national income has remained at the same level since 2008… The welfare per-capita has not been rising as no structural reforms are made. We need to stop being lost in the middle of empty daily discussions and focus on making reforms. Otherwise, it will be no good to us,” Hisarcıklıoğlu said at a meeting of the Economy Journalists’ Association (EGD).

Hisarcıklıoğlu said businesspeople have had problems with cash proceedings for the last four months and the number of rubber checks increased by 3.7 percent this year from the first months of the previous year. He also noted many exporters have faced problems too, as they purchase goods in advance, but sell their goods on credit. Only 9 percent of exports are made in cash, whereas the number of imports made in cash is around 49 percent, said Hisarcıklıoğlu.

Employers’ union has no hope for 1st quarter

The Turkish Confederation of Employers’ Unions (TİSK), the top body for employers’ organizations, also voiced its concerns over Turkey’s recent “inability to grow.” In a written statement, TİSK said the industrial sector has been irritated and losing power. The organization noted industrial production decreased in January for the first time in the last four years, causing shrinkage in company revenues and the use of production capacities. “The signs of economic recession and of distrust have been increasing,” read the statement. The organization said there was a 2.2 percent decrease in industrial production on an annual basis. “The revenues have been decreasing and the capacity utilization rates fell to 72.4 percent by the end of March. The recent data does not give hope about the growth rates in the first quarters,” said the statement.

Criticism from top bosses

A number of leading businesspeople have also recently voiced their concerns about the economy, including Akbank Chairperson Suzan Sabancı Dinçer and Anadolu Group Chair Tuncay Özilhan, one of the former presidents of the top business organization, TÜSİAD.

Özilhan said the GDP growth of the country has been slowed by the government on purpose in recent years to ease the current account gap.

“Turkey could solve its unemployment problem as long as it could grow by and above 7 percent. The problem remains unsolved with any growth rate below this. We see this is happening now as the unemployment rate surpasses 10 percent,” he said.

Özilhan emphasized the Turkish economy’s biggest problems are the chronic current account gap and the resulting saving gap, but no robust steps have been taken to solve these problems for years. “The higher the current account gap, the more need the authorities feel to put on the breaks in the economy. When the current account deficit decreases, the whole economy reaches a balancing point, but unemployment increases at this point. Investments that will decrease the current account gap needs to be supported. The existing incentives are not enough to meet this goal,” Özilhan said.

“Politics comes before economics right now. Economics needs to get ahead of politics, appearing in headlines more and being administered better than it is now. We see some disorganization in the administration of the economy. Everybody focuses on the June elections now…After the elections, [Deputy Prime Minister] Ali Babacan may not be leading the economy team. We do not know what will happen then,” he added.

The Banker Magazine gave a place to Dinçer’s comments about the Turkish economy and the banking sector in its April issue. She said savings decreased by around 51 percent, but the growth in loan rates increased. Dinçer said the saving rates have now regressed to around 12-14 percent, from around 23.5 percent in the 1990s.

Dinçer said higher loan-to-deposit rates will constitute a new obstacle for the banking sector.

“The oil slump may help Turkey to improve its current account figures, but what Turkey needs is to encourage its citizens to save more to be able to grow steadily in the long-term,” Dinçer said.

Confidence decreasing

Deteriorating “confidence indexes” have also caused the country’s business circles to have and voice concerns about the sustainability of the Turkish economy. The consumer confidence index decreased in March by 5.4 percent from the previous month. The real sector’s confidence index decreased from 104 to 100.9, the services sector’s confidence index from 101.86 to 101.25 and the retail sector’s confidence index from 103.4 to 102.97. The construction sector’s index regressed to 83.67 in March, a 1.6 percent decrease from the previous month.

The economic confidence index decreased to 74.85 points in March, a 15.4 percent decrease from the previous month. According to the TÜİK statement, the decrease in the economic confidence index was a result of decreases in the confidence indexes of the manufacturing, service, retail and construction sectors.

The economic confidence index indicates an optimistic outlook about the general economic situation when the index is above 100 and a pessimistic outlook when it is below 100.

Critics come together under the following motto upon all this data: “We need a new growth story.”
That is true, but how? This is the greatest question and we need to find an answer…

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Turkey enters election year with ‘zero’ growth

Mustafa SÖNMEZ – Hürriyet Daily News/March 30/2015

The Justice and Development Party (AKP) government, which targeted 4 percent growth in its program for the 2015, has not had a very positive start. Estimates show that the first quarter’s growth rate did not exceed the growth rate of the first quarter of 2014 – in other words there has been a “zero growth.”

In a note prepared by Bahçeşehir University’s Center for Economic and Social Research (Betam), it was stated that “There was no growth in the first quarter compared to the previous year,” and overall growth for 2015 is estimated at 0 percent. The Central Bank has also implicitly agreed with this outlook.

“Zero growth,” especially in an election year, for an administration that has a growth target of 4 percent, is no small matter. Despite all the support from public expenditure, the government is not able to enter the June 7 election period amid a lively economic conjuncture. In particular, the global economic outlook does not allow the government to show a lively, vivid, satisfactory economic picture to the voter before the election.

The first quarter of the year was like this; but will it change in the second quarter? We will have to wait and see whether the budget channels will be opened and populist economic policies implemented by the government, despite the likely deficits. For subsequent quarters this year, however, there are currently no positive signals related to growth.

Betam forecasts this for the rest of the year: “We do not expect a significant recovery in domestic demand in 2015. If European Central Bank policies are influential on European demand, then a limited recovery in foreign demand may be observed toward the end of the year. However, generally we foresee that in 2015 growth will remain quite weak.”

Growth in 2014?

While forecasts are being made for 2015, the Turkish Statistical Institute (TÜİK) is set to disclose the growth data for the last quarter of 2014 on March 31, thus rounding off the overall 2014 picture. In the first three quarters of 2014, Turkey’s growth rate was 4.8 percent, 2.5 percent and 1.8 percent respectively. The last quarter is estimated to have had a growth rate of 1.5 percent, based on the industrial production index and foreign trade data.

Industrial production was not satisfactory in the October-December period. While the appreciation in the value of the dollar was expected to motivate exports and spark growth, this did not quite happen. Both the stagnation in the EU, which remains Turkey’s biggest market, as well as the rapid devaluation of the euro against the dollar, prevented Turkish exports from being directed to EU markets. The Middle East market, on the other hand, because of the negative effect of falling oil prices on demand, also could not become a focus for exporters. As a result, there has been no increase in exports; in fact, there is a slight decrease. If the growth rate of the last quarter of 2014 is indeed 1.5 percent as estimated, then this mark the most unsuccessful growth of a quarter since the last quarter of 2012, which saw 1.3 percent growth.

If the last quarter’s growth was 1.5 percent, then the growth rate for 2014 as a whole would be 2.6 percent, barring any revisions on previous quarters by TÜİK.

Is this a low growth period?

When we enlarge the picture, we can see that Turkey entered a low growth period starting in 2012. After the downsizing experienced in 2008 and 2009, the average 9 percent growth rates of 2010 and 2011 could not be everlasting. The perception given to the world of “miracle growth” was misleading. Annual growth dropped to 2.1 percent in 2012 and it was barely 4 percent in 2013. In 2014 it is estimated to be lower than the target, at around 2.6 percent. In 2015, the first quarter has shown zero growth.

It therefore seems that the thesis of Turkey entering a low growth phase is proving to be correct. No doubt, when this thesis first emerged, people reviewed where the wind of growth in Turkey’s economy came from, how it increased, how it decreased, and the key variable. That key variable was external resources and the international capital flow.

More than anything else, growth means the need for capital. If a country’s domestic savings are adequate for growth, then no problem. However, when domestic savings are not adequate for the desired growth, then it becomes necessary to use external savings with their interest rates, or to woo these external savings by calling on people to invest. There are countries in the world that are able to continue growing based on their own savings, but they are in the minority. Those countries that need the savings of others, those that cannot grow without the capital flow of those international savings, are the majority, with Turkey among them.

2001 and after

Just by looking at Turkey’s 2001 financial crisis and after, the relationship between capital flow and growth can be seen directly. Before 2002, foreign capital flows to Turkey were limited. Foreigners were not interested in Turkey’s economy. Under the circumstances of that day, there were many other market alternatives.

Solving certain problems that kept foreigners away from Turkey took place amid the 2001 crisis and afterward. As a result of the 2001 “reforms” that curbed vulnerabilities – such as the major bottlenecks in the banking system and especially the endless public deficits – Turkey became a country where foreigners would want to invest. Reports from the IMF and international ratings agencies all approved this. What’s more, the effect of the abundance of liquidity in the world also reinforced the flow to Turkey. The AKP’s coming to power as one party, and its being in harmony with the IMF programs, also had an effect on the flow of foreign resources. Starting in 2003, Turkey therefore experienced an unprecedented flow of foreign resources.

Growth, crisis, growth, shrinkage

The growth venture of the AKP era, starting after the 2001 crisis, consists of four sub-periods depending on the foreign capital flow. In the 2003-2007 period, foreign investments had extraordinary dimensions. With this foreign resource flow, annual national income grew by an average of 7 percent.

However, this growth was oriented toward the domestic market, especially construction. When growth was domestically focused, the urge to earn foreign currency came second and growth was sustained with the forex deficit, in other words with current account deficit. This was so much the case that, within a short period of time, the ratio of the current account deficit to national income had gone up to 7 to 8 percent. This had become an unsustainable current account deficit, and the foreign debt burden rapidly grew. By the time we got to 2014, Turkey’s foreign debt stock of $400 billion was slightly over half the national income.

This growth – even though it neglected industry, especially the exporting industry – gained voters for the AKP, and as these voters grew politically stronger the party did not start looking for a different paradigm.

The 2008-2009 crisis period came after the first growth period and was a reflection of the global crisis, which hit Turkey badly in the short term. The contraction in 2009 was nearing 6 percent. However, especially because the public financing was strong and effectively used, the crisis was manageable and those foreign investors who withdrew were able to be attracted again. As a result, an average of 9 percent growth was experienced in the next two years, 2010 and 2011.

Decline years

The growth of 2010 and 2011 was again construction- and domestic market-focused, it rapidly increased the current account deficit and fragility, and 2012 became a “cooling” year. The year 2012 closed below the 3 percent growth target, at 2.1 percent. However, in the following years, a high growth rate was not able to be reached again because there was a change in the financial climate across the world.

In mid-2013, the U.S. Federal Reserve announced that it would halt its support for shares, followed by increases in interest rates, thus leaving those using loose monetary policies to adopt tight ones. This announcement heralded global funds steering toward the U.S., and this was indeed what happened.

A rapid withdrawal of capital was experienced from emerging countries, including Turkey. Local currencies and the Turkish Lira lost value against the dollar.

This, together with the rising political risks that climbed with the corruption operations of Dec. 17 and 25, 2013, as well as the geopolitical risks with the unrest roiling the Middle East, was experienced more intensely in our country. The interest rates that were increased to curb the climb in the dollar’s value hit domestic demand, making low growth inevitable. As a result, Turkey’s economic growth – which barely made it to 4 percent in 2013 – dropped to 2.6 percent in 2014. This period of low growth seems to be continuing in 2015 too. At least that’s what first quarter data indicates.

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Fed bound for ‘moderate increase’

Mustafa Sönmez – Hürriyet Daily News – March/23/2015

For long years, the world economic literature was not locked into a word such as “patient.” When the U.S. Fed turned the topic of the timing of the rise of interest rates into a lotto, then the answer to the question “when?” was formulated as: “being patient and not being patient.” The patient stance meant there would be no rush in the decision to raise interest rates; removing the patient stance meant “that moment” was nearing. Then came the awaited March 18 statement, when Fed governor Janet Yellen said they would not be in their patient stance anymore in increasing interest rates but they would not be impatient either, giving the signal of a soft rise. This is also called the “dovish stance.”

Yellen said, “Today’s modification of the forward guidance does not mean that an increase will necessarily occur in June, although we can’t rule that out.”

Yellen emphasized that interest rate decisions were totally based on economic conditions and “an increase in the target range for the federal funds rate remains unlikely at our next meeting in April.”

Despite that, Yellen said, “Let me emphasize, however, that the timing of the initial increase in the target range will depend on the Committee’s assessment of incoming information. Today’s modification of our guidance should not be interpreted to mean that we have decided on the timing of that increase.”

She also said, “… market participants should be is looking at incoming data, just as we are…”

IMF warnings

The warnings of the International Monetary Fund (IMF) were influential in the Fed’s caution. On March 16, IMF head Christine Lagarde said more than six years after the global financial crisis, “the recovery remains too slow, too brittle and too lopsided.”

Speaking in New Delhi, India, Lagarde said, “Looking ahead, something better may yet come on the back of low oil prices and low interest rates. Still, there are significant risks to this fragile global recovery.”

vvReminding that the global economy is expected to grow by 3.5 percent in 2015, Lagarde also said, “This is still below what could have been expected after such a crisis.” She warned about “asynchronous monetary policy” in advanced economies, which may result in excessive volatility in financial markets.

In the Fed’s moderate pace decision, these warnings are influential. The Fed has to consider the global reaction of each step it takes; it needs to.

Forex rates

Since mid-2013, the Fed’s signals on raising rates have caused global funds to take new positions and turn their faces to the U.S., thus resulting in the devaluation of local currencies against the dollar by those funds leaving their host countries. Against the strengthening dollar, several central banks devaluated their own currencies against the dollar; especially the euro rapidly lost value against the dollar.

According to IMF data, the devaluations against the dollar and repositions, which accelerated in 2014, continued to accelerate in the first two-and-a-half months of 2015. With the message of the Fed’s March 18 meeting, fluctuations in local currencies restarted and they will continue.

According to the IMF, when the one-year period covering March 18, 2014, and March 18, 2015, is taken into consideration, the sharpest devaluation was seen at the Russian ruble with 69 percent. The Crimea and  Ukraine issue was the most important factor in this loss; however, since the beginning of 2015, the decline in the ruble has stopped.

In the yearly basis, the Brazilian real has become the most devaluated “emerging” local currency with 39 percent, with its loss nearing 22 percent since the beginning of 2015.

The loss of value of the euro against the strengthening dollar has become 24 percent in one year. The euro/dollar parity was 1.33 on March 18, 2014; it was 1.05 one year later. The new Fed decision is expected to decrease this toward 1.

While the Japanese yen devalued over 19 percent against the dollar in one year, the Chinese yuan’s loss has been 0.4 percent since the beginning of 2015. It is now being mentioned that for  China  to maintain its growth based on exports it may opt for devaluation against the dollar, which would create new fluctuations in world equilibriums.

Losses in the Turkish Lira 

The Turkish Lira, while it lost 18 percent value against the dollar on a yearly basis, has started losing fast against the dollar since the beginning of 2015. In 2015, the lira’s loss neared 13 percent in two-and-a-half months, accompanying the Brazilian real in the biggest losses.

After the Fed’s recent statement on the interest rate, it is wondered now whether it will trigger new capital outflows from Turkey and whether lira savings will be directed to the dollar.

The “moderate stance” statement and the lifting of the “pressure from the palace” on the Central Bank for now may have positive effects on the dollar/lira parity. Meanwhile, the “reconciliatory” meeting between President Erdoğan and the Central Bank did not have any effect on the climb of the dollar. The factor has always been the external dynamics; it has been proven by these developments.

Escape from the euro

With the attraction of the strengthening dollar, escape from the euro has accelerated; the dollar/euro parity has gone down to 1.05. This rate was 1.33 in 2014.

Even the currency of the 19 member countries of the  European  Union cannot withstand the dollar strengthening in the entire world. With the interest rate increase decision of the U.S., the euro and the dollar are expected to equalize. As the U.S. economy recovers, global funds are leaving not only countries like Turkey, but also the EU, which is stagnated and taking positions in the United States.

Resorting to liquidity expansion to overcome the disinflation problem of the EU will result in an interest toward the U.S. and the dollar. This situation is expected to equalize the euro and the dollar.

After 2002, the euro gained value against the dollar and it peaked at 1.47 dollars before the global crisis. However, during the crisis years, in 2009 and afterward, with the effect of the shrinkage in the Eurozone, the euro could not keep its supremacy against the dollar. Since 2013, as the U.S. economy gave signals of recovery and as positions toward the dollar accelerated, the euro’s devaluation against the dollar also accelerated. Despite this, in 2014, the dollar/euro difference remained at 1.33. The euro’s sharp loss of value happened in 2015 when the dollar strengthened against all currencies and the parity was near 1.05 in mid-March.

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With any sign of a U.S. interest rate raise perception, the euro will lose value. Those who were staying in the euro are now opting for the dollar. Exporters to the EU with the euro in Turkey have started losing, both because of decreasing demand and because of the euro’s devaluation against the dollar.

This has a declining effect on exports.

Euro-savers have started switching to the dollar.

What about the yuan?

It is a special source of wonder what the stance against the strengthening dollar the currency of emerging giant  China will be. It is a widespread belief that there is no other alternative for  China but to devaluate the yuan to increase its exports and its wavering growth. In this respect, it is argued that  China will remove its currency from the dollar band and this would choke the world into waves of deflation. In possibility evaluations, it is being reminded how the devaluation of the yuan in 1994 contributed to the Asian crisis.

Competitive power

There are two faces to the strengthening dollar. On one face, the strengthening in the dollar is taking the U.S. to the leadership position again. But strengthening also stimulates exportation to the U.S. market from those weakened currencies; the strong dollar increases export motivation. This is true for the Eurozone,  China and several other countries with exportation power. The export motivation to the U.S. market is a development which would lower the growth and employment in the U.S. as well as toughen the industry and service sectors. For this reason, the Fed has to take cautionary steps and has to foresee what outcomes its steps will create in the world economy.

For the weakening lira against the strong dollar, it is not that easy to switch to exports. This is such a neglected industry in the past 10 years that the dollar attraction solely is not adequate to motivate the exporter. Despite the attraction of the dollar, exports do not increase; actually they even decrease.

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Dollarization and downsizing concerns

 Mustafa Sönmez-  Hürriyet Daily News, March/ 16 /2015

Since the beginning of the year, in the list of the national currencies of the fragile five, which includes Turkey, devaluating against the dollar, Turkey has separated from the group. In the period between the beginning of the year until March 6, the Indian rupee gained 1.5 percent in value against the dollar.
The South African rand lost 4.1 percent and the Indonesian rupee lost 4.5 percent in value; whereas the lira lost 11.4 percent value in the same period. The devaluation of the lira is at a level incomparable to the others. From these five countries, the nearest one to the lira, even though not equal, has become the Brazilian real.

If the devaluation of the lira were as much as the devaluation of the countries – other than Brasilia – the Central Bank’s interest rates and some intervention in foreign currency could have helped. However, the lira, because of the condition unique to Turkey, has lost value in a sharp way.

Several domestic and international authorities have associated the high level of this blood loss to President Recep Tayyip Erdoğan’s pressure on the Central Bank to lower interest rates and the loss of confidence stemming from that. This situation has increased Turkey’s risk premium and the increased risks have carried the dollar higher.

Risk premium

The increased climb in Turkey’s credit default swap (CDS) in recent days has further decreased the appetite of the foreign investor, and together with outflows, the dollar is rapidly climbing against the lira. Turkey’s CDS was 185 on Jan. 16 when Erdoğan exerted pressure on the Central Bank and the dollar rate was 2.33 liras. Since then, CDS has increased, just as the exchange rate. At the beginning of the week, the risk premium was 201 and the dollar rate was 2.53 liras; at the end of the week the premium went up to 218 and dollar to 2.65 liras.

fuAbove Turkey’s 218 risk premium, there is Brazil with 253. However, South Africa follows Turkey with 195 and Bulgaria comes next with 171. Portugal has 129 while Spain has 92.

Difficult to stop

The January current account deficit was announced as $2 billion and the capital inflow as $7.5 billion. However, the month of January does not reflect the following months of February and March. The climate has rapidly changed. The current account deficit may still be low because of the fall in industry in the following months and the fall in the industrial imports but in February and March, it was observed that capital inflow rapidly declined. The outflows of capital also pushed the dollar up.

Because of the expectation of the Fed meeting and the fear of a signal of increasing interest rates in this meeting, while the Dollar Index has gone up to 98.50, in such an environment, it looks difficult for the Central Bank alone to stop the climb of the dollar with the decisions it has made one after the other.

For the dollar/lira to normalize and for the Bank’s moves to be effective, first of all, there absolutely has to be a break in the dollarization that develops in association with the rapid increase of the Dollar Index experienced globally.

Nonetheless, it is important in terms of “inner peace” that the information flow concerning the Central Bank to normalize fully and an entire harmony between the Bank and the government should be displayed for the markets. In this context, we would not know how effective it will be to use the meeting between President Erdoğan and Deputy Prime Minister Ali Babacan and Central Bank Governor Erdem Başçı to curb the tension; however international winds especially look as if they will highly marginalize this kind of image build-up effort.

It is very difficult for the Central Bank in its next scheduled meeting on March 17 to start a new action and make the interest rate cut that Erdoğan and his aides are hoping for, due to the current situation of the dollar/lira and uncertainties about the Fed meeting. Unless there is a positive improvement in the current domestic and international circumstances, it looks more probable that the Central Bank will have a “wait and see” policy.

If the dollar/lira rate stands at the 2.65 step, then the 2.68-2.70 band will stand out on an important psychological level. From there to move on to 2.80 will depend on news coming from the Fed.

Industry’s downward trend

The storm of dollarization is keeping many sleepless, especially the ones that have external debts totaling $400 billion. Two-thirds of this debt stock belongs to the private sector. Moreover, 40 percent of this amount has to be paid in 12 months. Any climb in the dollar means the loss of liras at the exchange rate.

ggIt is no secret that this situation turns the balance sheets of debtor firms upside down and negatively affects all investment decisions. Especially in the industry sector, the shrinkage that results from the shrinking of the domestic market and exports has begun to be seen in the figures.

The Turkish Statistical Institute’s (TÜİK) January data released on March 9 about industry production has shown that we have entered an important decline phase in industry. When seasonally adjusted, the January industry production fell 1.4 percent compared to December 2014.

Those declining rapidly

When the decline in production is listed from the most to the least, in computer, electronic and optical products, electrical equipment, the decline varied between 9 percent and 12 percent. The sharp climb in the dollar exchange rate is considered as influential on this production shrinkage.

It was also noteworthy that “mineral products” such as glass, ceramics, bricks and cement that are inputs for construction have declined 6.2 percent in production in one month. In particular, the decline in cement exports to Iraq has caused capacity drops in this sector. The fall in house sales and the stagnation in mortgaged sales because of high interest rates have also brought a decline in house production and the construction material industry.

The 6 percent production drop in cigarette production is again noteworthy. The drops in base metals, mostly iron-steel, and medicine, textile and food production are considered to be related to the fall in domestic demand and partially to the drop in exports. The manufacturing industry declined 1.4 percent in general in January.

The fear of losing one’s job

It is stated that the decline in industry production may continue in the coming months. This will be related to the stagnant course of domestic demand due to the increasing dollar exchange rate and non-declining interest rates. This negativity is accompanied by the devaluation of the euro against the dollar as well as the decline in exports.

The decreasing domestic and external demand is shrinking capacities in many workplaces and it is said that starting from this month, workplaces will begin taking precautions on employment. It is being reminded that originating from industry centers such as Kocaeli, Bursa and Tekirdağ, an employment shrinkage beginning with unpaid leave may be in question, just like the 2009 conjuncture.

In 2009, the exchange rate had a sharp climb with the effect of the global crisis and as a result of the shrinkage in domestic demand unemployment climbed to 15 percent.

It is also mentioned that especially in places where a union is not present, the crisis would be attempted to be overcome over the employees; also in workplaces where unions are active there could be some measures taken in agreement with the unions.

The unemployment risk stemming from the production drop in industry will also be felt in some branches of the service sector.

The stagnation in the construction sector will lower employment on construction sites. Declining sales in the retail sector will lower employment in this sector and this may be followed by finance, real estate and other service sectors, thus with falling advertisement spending there could also be downsizing in communication and media sectors, it is estimated.

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“Faiz gerilimi artacak, AKP içinde çatlak büyüyecek”(sendika.org)

Sendika.org’a verilen mülakat 13 Mart, 2015

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Foreign investors in Turkey close to finance, distant from industry

 

MUSTAFA SÖNMEZ – Hürriyet Daily News – March/ 09 /2015

The focus from the foreign resource inflow into Turkey from 2003 onwards, when the Justice and Development Party (AKP) took power, as well as the focus of foreign direct investments have been radically different from previous eras.

In the period under AKP rule, the acceleration of the inflow of foreign resources is mostly associated with the results due to the IMF’s controlled measures package for the 2001 crisis.

While a new IMF program was implemented in 1998, the 2000-2001 fluctuation dragged Turkey’s economy into a major crisis; the outflow of capital forced the Bülent Ecevit-led coalition government to take emergency measures to overcome the crisis. Kemal Derviş, trusted by the IMF and World Bank, was invited to Turkey as deputy prime minister and as a result of the bitter medicine administered by the IMF, equilibriums were reconstructed.

The policies implemented included the rehabilitation of the banking system, which had collapsed with the bankruptcy of about 20 banks, as well as a serious revision policy for central budget, social security system, the state economic enterprises (KİT), the privatization process, municipalities and agriculture sales cooperatives. Through these policies, public finance was also rehabilitated. These radical measures produced serious political results and coalition partners failed to pass the threshold in 2002 elections. This huge voter reaction was beneficial for the AKP. The recovering economy attracted extraordinary foreign resources.

HDN The AKP became the only ruling party thanks to the election system, which has a 10 percent threshold. One-party rule, plus the rehabilitated finance system and public finance, was attractive for foreign investors. The IMF control was a separate assurance. As a sum of all these factors, it resulted in an extraordinary resource inflow, some of them buying KİTs in the industry sector. The banking sector of the economy, which grew at an average of 7 percent during the 2003-2007 period, was a separate attraction for foreigners who also entered the finance sector by buying banks.

When the 2003-2014 period is reviewed, the foreign direct investment in these 12 years neared $120 billion. Almost one-third of the foreign resource inflow in the same period came as direct foreign capital while the remaining two thirds came as portfolio investment and credits – these are “debt raising capital.”

The sector breakdown of the FDI reveals another striking fact. Foreigners have chosen to invest in the finance sector more than in industry. The finance sector, banking and insurance have the biggest share in direct investment with 37percent.

The mobile phone market has been another attractive sector for foreign investors, nearing 10 percent of total direct investment. Foreigners engaging in commercial activities primarily did so in the retail sector, with the percentage exceeding 5 percent. Construction and real estate sector also attracted nearly 5 percent of foreigners. Other sectors such as transportation, health and other service sectors also attracted foreign capital, corresponding to a share of 62.5 percent of total foreign capital, constituting nearly $75 billion of the nearly $120 billion direct foreign capital in 12 years.

Capital foreign to industry

Industry has constituted a share of 37.5 percent in direct foreign capital in the general sense in this period; however, when the definition is narrowed to the manufacturing industry, only 22 percent of FDI has gone to the manufacturing industry. Energy investments have a share of 13.5 percent in total, while mining has almost a 2 percent share.

Thus, we can say that during the 2003-2014 period foreigners have invested $2.2 billion in manufacturing industry and $1.3 billion in energy industry annually. This is equal to the amount invested in the finance sector alone. In other words, foreigners have invested in the manufacturing industry, energy and mining an amount equal to what invested in the banking-insurance sector alone. This preference is associated with profitability. Because foreigners saw that profit rates in finance were higher than industry, they steered their investments in that direction.

While 22 percent of the almost $210 billion foreign direct investment in 12 years was directed to the manufacturing industry, their subsectors were food, alcoholic beverages and tobacco which had a one-fourth share. The entries to this manufacturing branch was nearly $7 billion in 12 years, with the privatization of Tekel and investments in the tobacco sector playing a major role.

The chemical industry (including medicine) has 17 percent share in manufacturing investments of foreigners. While the computer and electronic utensil subsector came third in attracting foreign investors in the manufacturing industry, the main metal industry is the fourth subsector with its nearly 11 percent share.  It can be seen that foreign investments in the subsectors of manufacturing are mostly domestic market-oriented sectors. It should also be noted that chemical and computer-electronics sectors have quite a high rate of imported inputs.

HDN

Foreign in the bourse

Foreign investments also came as investments in shares on the bourse. Investors involved in buying and selling shares traded on bourse are exporting capital this way.  According to Central Bank data, the value of shares of Turkish companies bought by foreigners at the end of 2014 was $62 billion. This amount was around $33 billion in 2005. This means an increase of around 88 percent in 10 years.

In 2005, in the portfolio of foreigners, 24 percent of shares belonged to industry firms and their market value was $8 billion. When it was 2014, the value of foreigners’ shares in industry firms reached $15 billion; the share did not change.

The sector preferences of foreigners where they became partners to companies do not vary much from their preferences in the stock exchange market.

In 2014, shares belonging to foreigners were predominantly from the finance sector, while 52 percent of the portfolio was made up of banking shares. At the end of 2014, the amount of shares of the financial sector that belonged to foreigners was $32 billion, with a share of 52 percent.

 

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Interest rate-foreign exchange rate conflict under the shadow of politics

Mustafa Sönmez

Hürriyet Daily News- March/ 02/ 2015

In Turkey’s economic agenda, as in several other emerging countries, there has been a conflict going on for a long time about the price of the interest rate and foreign currency. The price of foreign currency is determined by domestic and external dynamics at the end, but when it comes to the interest rate, the political will wants to take the independent Central Bank under its influence and make it do what it wants. However, wanting is not enough and the sharp wind of the market can seriously knock down this ambition.

For the international investor who was looking for a place to land in the world markets shrunken by the 2007-2008 global crisis, Turkey became an attractive address, especially in the years 2010 and 2011.
The volume of foreign currency grew by the inflow of foreign investments, pushing the exchange rates down. This situation also pulled down the interest rates.

In an economy oriented toward the domestic market, interest rates on consumer loans, which the consumer primarily uses for buying homes and automobiles, also followed a low course, making the mechanism work. However, after the domestic market-oriented growth expanded the current account deficit problem and when Turkey started having current account deficits reaching 8 – 9 percent of its national income, the brakes were pulled in 2012. In 2013, the pace did not catch up.

uuIn mid-2013, the developments in the United States that were to affect all balances in the world economy also affected the paradigm in Turkey. When the U.S. Central Bank Fed announced it would reduce bond purchases and increase interest rates in time, the U.S. started becoming the center of attraction for the world capital that had temporarily parked at countries such as Turkey. Capital outflow started from emerging countries; new inflows weakened.  In the decisions of foreigners to change their positions, the political risks and geopolitical risks were effective as well as economic risks.

Until mid-2013, the interest rates and the foreign exchange rates followed a level that the ruling Justice and Development Party (AKP) wished; however, since then they are not following their wished course, but rather are fluctuating. It is such a fluctuation that every month the expectation of what the interest rates would be changes; the foreign exchange rate, especially the dollar, makes shocking hikes. These change the entire state of affairs of the economy. Especially in a Turkey which is going through the conjuncture of the general elections scheduled for June 7, the economy stands out more.

Political pressures

The Central Bank Monetary Policy Board made its last interest rate decision in the meeting it held on Tuesday, Feb. 24, and lowered the interest rates a small slice. With this decision, the top end of the interest rate corridor was cut by half a point; the lower end and the benchmark rate, a quarter point.
While the Turkish Central Bank was doing that, it said, “Taking into account the elevated volatility in food and energy prices, the Committee decided to cut the interest rates at a measured scale.”
President Erdogan is aiming for the AKP to come out of the June 7 elections with a victory large enough to be able to change the constitution. The presidency he is wishing for will only be possible through a constitutional change with such voter superiority. In order to gain this voter mass, he wants a boost in the economy. He is hoping that this boost will be possible with the lowering of the interest rates and the activation of the domestic market. For this reason, without caring about its cost, without calculating what kind of damage it would cause other equilibriums, he wishes that the interest rates are lowered.

The Central Bank is constantly under Erdoğan’s pressure. Some members of the cabinet are accompanying him. One of them is Economy Minister Nihat Zeybekçi, and he did not consider the 0.25 cut adequate. Zeybekçi said, “In Turkey the benchmark rate should be below 7 percent and the top end of the interest rate corridor should be under 10 percent. I have not seen any courage in the Central Bank’s decision.”

Prime MinisterDavutoğlu does not adopt the same dose of reaction as President Erdoğan and his entourage; he speaks more “moderately.” While speaking in Budapest, Davutoğlu said it was significant that the interest rates were trending downward and that this situation was one of the healthy indicators of the Turkish economy. Davutoğlu said, “It is positive that interest rates have a downward trend. I’ve said this before and would like to restate that we would like further monetary easing. We would like rate cuts to continue in Turkey.”

On January 20

In its previous meeting, the Central Bank Monetary Policy Board (PPK) had lowered the interest rates from 8.25 percent to 7.75 percent. This decision also was not liked by Erdoğan and some cabinet ministers who want to face the election conjuncture with an economic boost through interest rate cuts. The pressure for a bigger cut forced the Central Bank to pledge to convene extraordinarily on Feb. 4 for a possible cut in the case that the inflation rate came out low. There was an immediate reaction to this pledge and the dollar rose 8 percent against the Turkish Lira from a level of 2.32 up to 2.51. However, when the January inflation came out higher than expected at 1.1 percent and when the reaction of the dollar to a cut was apparent, the Central Bank’s meeting to determine the interest rates was back to its normal schedule, Feb. 24.

Before the Feb. 24 meeting, President Erdoğan and some ministers continued their pressure that the lira was too high and the interest rate cuts should be bigger. The Central Bank’s quarter point cut did not make those behind this pressure happy, but the bank gave the message: “In the light of this inflation and the exchange rate pressure, this is all I can do.”

Taking sides

Over the Central Bank’s interest rate decision, the sides politicians are taking became clearer. While Deputy Prime Minister in charge of the economy Ali Babacan and Finance Minister Mehmet Şimşek supported the Central Bank, fearing the reaction of external markets and a possible overturn, it was interesting to see Bülent Arınç joining them. Prime Minister Davutoğlu though, opted for a more “central” path. Former President Abdullah Gül, who is preparing for a comeback to politics, is emphasizing the independence of the Bank.

Foreign exchange rates

Any decision on interest rates has an immediate effect on the price of foreign currency. Especially when foreign investors take positions according to the rising political risks and the international climate as well as the interest rate cut, then foreign exchange rates fluctuate. Against the upward effect on the dollar of the Feb. 24 cut decision, the speech of Fed president Janet L. Yellen on the same day had a counter-effect. When Yellen did not speak too promisingly about interest rate increases, the price of the dollar came to a stop, again.

jjDespite this, political risks rising in certain regions, geopolitical risks, provide a suitable platform for the dollar to rise against all other currencies. In general, there is a devaluation of local currencies against the dollar in the world. The lira has lost 45-50 percent of its value in the past two or three years and whether it will continue to lose depends on the monetary policies adopted.

All local currencies in the world are priced again against the dollar. This process has certain differences among the currencies of developed countries, currencies of emerging countries and the currencies of oil-producing countries.

Oil-exporting countries, among which are Azerbaijan, Algeria, Iran and Libya, are trying to balance the growing gaps between their decreasing oil revenues due to the fall in oil prices and non-decreasing foreign currency expenditures, with high devaluations. Azerbaijan’s currency, the manat, has been devaluated 34 percent, for instance.

Rich countries also in accordance with the fall in the commodity prices, in order to support their falling exports devaluated their money against the dollar. Norway, Sweden, Denmark and even Canada were countries which devaluated their currencies in the past four month with a rate of between 12 and 14 percent.

Emerging countries

Local currencies of emerging countries, of which Turkey is among, are going through significant changes depending on the preference of the foreign investor in the country. Among them, Russia  leads the group which, due to the Crimea and Ukraine issues and the effect of the economic sanctions imposed by the U.S. and EU, has devaluated the ruble almost 42 percent in four months.

The currencies of theCzech Republic, Poland and Hungary, which are considered the backyard of the EU, are among those that have lost value with the withdrawal of foreign investors. The Czech koruna lost 10 percent in the past four months, as did the Hungarian forint, while the Polish zloty lost nearly 9 percent.

The loss of the lira and others

Turkey stands out as another important country whose currency lost nearly 10 percent of its value against the dollar in the period between November 2014 and February 2015. While the average dollar price in November was 2.24 liras, it went up to 2.29 in December and in January it was 2.33 liras. The first three weeks of February were up 2.45 liras. This was the result of the pressure of the president and some politicians close to him on the Central Bank to lower interest rates and with the withdrawal of foreign investors the dollar/lira rate in February at one time exceeded 2.51.

The dollar did not climb past 2.50 because of a Feb. 24 cut decision, but it looks as if it will not go below 2.45 either.

The Mexican peso and the Brazilian real also went through devaluations almost as much as the lira in the past four months; however the South African rand and the Indian rupee had devaluations against the dollar relatively low, around 4.5 percent. It is observed that the foreign investors withdrawing from Russia, Turkey, Europe and Brazil are mostly trending toward India  and South Africa among emerging countries.

March/02/2015

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Turkey’s external gaps growing rapidly

 

MUSTAFA SÖNMEZ – Hürriyet Daily News/ February 23 2015

The “equilibrium” situation in countries’ relations with global economy has vital significance. How much a country can cover its foreign debts to global markets and other liabilities with its assets it has contributed to the global economy, in other words, with its investments in the external world and with its domestic gold and foreign currency reserves? If there is a gap in its liabilities versus assets, what is its dimension and where does this stand at its national income?

HDN This indicator and similar ones, reveal the fragility coefficient of countries. The method to measure this has been determined by the IMF and it collects information from member countries with a handbook.

How much are your assets, how much are your liabilities and thus what is the dimension of your gap or surplus?

In Turkey, the Central Bank produces the International Investment Position (IIP), which is the stock value at a certain date of external financial receivables and financial assets versus external financial liabilities. This statistical data is updated every month.

In IIP, the difference between the total financial assets and total financial liabilities, is named the net international investment position. In other words, the net international investment position is the net of Turkey’s receivables from other countries and Turkey’s debts to other countries. The IIP can be negative or positive.

For Turkey and similar countries, the IIP is generally negative. External assets are not enough to meet external liabilities. This situation changes from year to year. The rate of Turkey’s assets meeting its liabilities and the size of its external gap according to its national income are increasing instead of decreasing every year and its risk coefficient is rising.

HDN

The picture at the end of 2014

Last week, Turkey’s IIP gap was declared for 2014 as $431 billion by the Central Bank. In the Central Bank data for December 2014, while Turkey’s external asset-receivable amount was defined as $230 billion, the amount of its external debts and other liabilities were reported to have reached $661 billion. In this case, as of the end of 2014, Turkey’s position gap has reached $431 billion and it has surpassed the gap of 2013 by $37 billion.

This means only 35 percent of meeting debts and liabilities and that Turkey has a disadvantage of 65 percent. In the wide sense, external debts are 187 percent more than external receivables.

Turkey’s national income of 2014 will be announced at the end of March and it is estimated to be $800 billion. In this case, debts will reach 54 percent of the national income. This rate was 48 percent in 2013. This means the position gap has worsened $37 billion in one year, increasing 6 points.

Beware the course

While Turkey’s external assets increased only $4 billion in 2014, its external debts and other liabilities increased $41 billion. It looks like the value of foreign direct investments in Turkey has increased $19 billion. While the value of foreigners’ investments in securities has been $10 billion, their investments in state bonds increased 14 billion. There was a $2 billion decrease in foreigners’ external debts.

The picture does not look good as of 2014, with $661 billion liabilities versus assets that can only cover nearly 35 percent of them. The fact that assets can only meet 35 percent of liabilities means that there are no assets to cover almost two-thirds of debts and other liabilities. The size of the gap that reaches 54 percent of the country’s national income is considered a significant fragility.

The situation that has emerged at the end of 2014 is the product of a buildup of years. In the first year of the rule of the Justice and Development Party (AKP), which was 2003, Turkey’s assets reached $74 billion while its liabilities were $179 billion. In other words, assets were able to cover 41 percent of the gap that was 35 percent of Turkey’s national income. The year 2003 was one when the AKP prepared to further integrate with global economy and, from there, draw more loans, hot money and direct investments. In following years, warming and integration accelerated.

For more privatizations and purchases, more foreign capital flew in, more hot money went into the stock exchange and state bonds and more loans from foreign banks started to flow in. As a result, debts and other liabilities increased more than the buildup of assets and at the end of 12 years, in other words, in 2014, the rate of the assets meeting liabilities went quite below what it was in 2003, from 41 percent to 35 percent. The amount of foreign gap, in the same period, went up from $105 billion to $431 billion. The rate of the gap in national income hiked to 55 percent from 35 percent.

Among the fragile

The dimensions Turkey’s position gap have reached, even if only Europe is analyzed, show that it is among the leading of the fragile countries. For the IMF, if the rate of the position gap to the national income exceeds about 40 percent, then it is considered that the red line has been crossed. The place Turkey has reached is 54 percent. This is very fragile and it is a rate that would scare foreign investors.

HDN

The burden in terms of Turkish Liras

While the average dollar exchange rate was 1.90 Turkish Liras in 2013, the average dollar exchange rate became 2.20 liras in 2014. Thus the increase in the dollar exchange rate reached 16 percent. Both with the effect of the increase in the exchange rate and also the increase in the debts to foreigners, Turkey’s external liabilities increased in terms of liras nearly 24 percent in one year. Its debts and other liabilities in liras increased 276 billion liras to reach 1 trillion 454 billion liras.

In other words, the increasing foreign dependency has giant costs in difference in exchange rates and only in 2014 this exchange rate burden was 276 billion liras and with the dollar exchange rate of 2014, it was $125 billion.

One does not even want to think of the extra burden that would be brought on the position gap with the likely leap in the dollar exchange rate with the U.S.’ interest rate increase…

 

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Turkey’s industrial sector highly dependent on raw material imports

Mustafa Sönmez    Hürriyet Daily News – February/16/2015

The Turkish economy, after 2002, by using the foreign capital inflow of an annual average of $40 billion, was able to grow 4.5 percent annually. With this capital inflow, Turkey’s imports and exports also grew rapidly. So much so that the imports, which were $40 billion in 2000, reached $242 billion at the end of 2014. This corresponds to an increase of 505 percent. Imports, which were around 15 percent of the national income in 2000, went up to 30 percent of the national income at the end of 2014. This corresponds to a nearly 100 percent increase in 15 years.

Turkey’s trade with the world economy, even only in the last five years, increased 33 percent from $300 billion to become $400 billion. While foreign trade constituted 41 percent of the national income, in 2014 this figure went up to 50 percent. The average of the past five years is 47.7 percent. Even this shows how much a huge integration has been experienced in a short time. The averages of the past four years, the period from 2010 to 2014, have incredible indicators. Turkey, in these four years, has had $231 billion of importation against $142 billion exports; in other words, the foreign currency gained from exportations was only able to cover 61 percent of import expenditures. As an average, Turkey was a net importer of $89 billion every year, in other words, had a foreign trade gap of $89 billion each year.

vvvWhen agriculture is excluded, which has a share of less than 5 percent in foreign trade, it can be seen that imports of industry and energy, which were $136.3 billion in 2010, increased to $233.6 billion in 2014. These two sectors’ annual average of the past five years is an importation bill of annual $223.5 billion. On the other hand, our industry exports, which barely reached $109 billion in 2010, have been nearing $152 billion in 2014. The average of the past five years is an annual $137 billion of exports of the Turkish industry. The foreign trade gap of the industry was $70 billion in 2010, going up to $82 billion in 2014, averaging almost $87 billion a year.

Export three, import four

Taking the average of the past five years, the annual increase in exports is 9 percent while the annual increase in imports is 12 percent. In other terms, while exports rise by three, imports rise by four. The average increase of the past five years in the foreign trade gap is 22 percent. Again, as the five year average, the rate of exports covering imports is 61 percent. This is the most important indicator of dependency.

The backbone of industry, which is exports, has constituted an average of 18.2 percent of the national income in the period 2010-2014. However, imports are more and are nearing 30 percent of the national income. This means that Turkey’s national income has a foreign trade gap of around 11.4 percent every year, which is quite high. This is a negative feature that makes Turkey quite fragile.  In every sector, there is both exportation and importation. While it varies from sector to sector, there is a distinction between sectors that have strong export power and those that do not.

As a result, when growing foreign trade gaps cannot be closed with foreign currency inflow through the service sector, tourism, etc., then giant current account deficits emerge that are in the 7-10 percent corridor of the national income. And this means more dependency on external resource inflow and in order to provide this inflow, succumbing to several unwanted policies.

An analysis of the 2010-2014 period shows that net exporter or net foreign currency earner sectors constitute 12 of the 29 sub-sectors. In this analysis period, the net exporter sectors exported nearly $64 billion as an annual average, while importing $31 billion. The imports of these sectors made up 49 percent of their exports.
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Among net exporters, the first three places belong to wearing apparel-textile and food sectors, followed by non-metallic minerals (ceramics, glass, cement, etc.) and metal products.

Among the net exporter top 10 sectors, the apparel sector constituted nearly 30 percent of the net exports in the past five years; textile has a share of nearly 23 percent. Thus, these two sub-sectors that are complementing each other have a share of 53 percent in net exports. When you add food, which nearly has a 14 percent share to this, these three traditional branches that have a low added value constitute two-thirds of Turkey’s net exports. It has been like this for years and shows the skidding in industry.

ttAmong the 17 net importer sub-sectors, the highest net importation or the highest foreign trade gap, as expected, belongs to energy, in other words, to the importation of crude oil, natural gas, coke, petroleum products and pit coal. In the 2010-2014 period, Turkey’s annual energy importation has reached $52.5 billion. In return for this total importation, the export of energy products are merely $6.1 billion and average annual importation has neared $46.5 billion.

With the setup of “low foreign exchange rate – high interest rate,” they were able to maintain the capital inflow for more than 10 years, but at mid-2013 due to the developments especially in the U.S., the umbrella of the foreign exchange rate upturned. When political and geopolitical risks were added to the increasing economic risks, capital inflow decreased and foreign exchange rate hiked. The dollar exchange rate, which was 1.80 Turkish Liras in 2012, went up to around 1.90 liras in 2013 and closed the year 2014 with 2.20 liras. The depreciation of the lira over 15 percent in especially 2014, even though it relatively decreased imports, did not bring the expected increase in exports. Despite the 15 percent increase in the dollar exchange rate, the increase in exports was below 4 percent. The same year imports decreased around 4 percent.

The course of the exchange rate has a vital importance for indebted establishments that had foreign debts reaching $400 billion, out of which 30 percent were short term loans. The private sector used two-thirds of this debt. It is of huge importance for banks and companies that the dollar exchange rate exceeded 2.50 liras at mid-February. Huge foreign exchange losses will negatively affect many industrial firms.

 

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