Turkey’s banks at ease while industry stresses
Mustafa Sönmez - Hürriyet Daily News, August/ 17 /2015 Turkey’s economy is going through…
A notable aspect of the crisis-hit Turkish economy in recent months is the improvement in exports and tourism, which, along with increased public spending, has helped limit the second-quarter contraction to 1.5%. The uptick, however, has come at a price, with exporters and the tourism industry cutting prices, atop the sharp depreciation of the Turkish lira.
The July-September period is likely to mark the fourth quarter in a row that the Turkish economy has shrunk in year-on-year terms. The plummeting of investments has been the primary driver of contraction, followed by the decline in household spending or private domestic demand. Though the ruling Justice and Development Party refuses to use the term “crisis” for the current state of the economy, the country’s gross domestic product (GDP) has decreased 1.1% over 12 months. In terms of dollars, GDP has plunged to $722 billion, a far cry from the $950 billion in 2013.
Nevertheless, the contraction in the past 12 months has been less severe than in Turkey’s two previous big crises in 2001 and 2009. Two factors have contributed to avoiding a steeper downturn — a rise in government spending, driven by local elections earlier this year, and an increase in exports and tourism revenues.
A closer look at the exports and tourism data, however, shows that the easing impact on contraction has come at the expense of offering cheaper prices to foreign customers.
In the first quarter of the year, exports rose 2.6% from the same period in 2018 to reach $42.2 billion. In the second quarter, exports were worth $41.5 billion, increasing 1.1% year-on-year.
In a January report, the head of the Turkish Exporters Assembly, Ismail Gulle, had put the export target for 2019 at $182 billion, well above the $168.1 billion last year, which he described as “the highest export figure in our republican history.” He listed a number of new projects aimed at boosting exports, stressing that sustainability and innovation would be the main guiding tenets.
Whether the target is attainable remains an open question amid the recession winds blowing in the global economy. International trade is facing additional risks due to the ongoing trade war between the United States and China, coupled with other critical factors such as China’s economic slowdown and the prospect of Britain leaving the European Union without a deal to replace current trade arrangements. The US sanctions on Iran, the situation with North Korea and the conflicts in countries such as Syria, Yemen and Ukraine pose additional geopolitical risks that might have adverse impacts on global trade.
Nevertheless, Turkish exports totaled $83.5 billion in the first half of the year, leveraging the economy in the face of domestic contraction and preventing a more serious overall shrinkage. Beyond quantity, however, the qualitative aspect of exports should be analyzed as well. What kind of prices made it possible for exporters to achieve this figure?
The dramatic depreciation of the Turkish lira in the second half of 2018 led to a sharp decline in the country’s imports. Imported materials and equipment became more expensive in terms of lira, fueling cost-push inflation. For exporters, however, the slump of the lira provided a tailwind.
Exporters often cut prices in such circumstances to secure their markets and achieve their turnover targets since they are mainly concerned with what their revenues are worth in terms of lira. Not surprisingly, a decrease in unit prices is seen behind the current level of export revenues. According to monthly data by the Turkish Statistical Institute, unit prices of exported goods have decreased 7% in the 18 months since January 2018. In other words, an export product that was sold for $100 in January 2018 had its price fall to as low as $93 by July.
A similar trend can be observed in the tourism industry, the second-largest hard currency earner for the country. Net tourism revenues, which denote the difference between tourism revenues and tourism expenditures, stood at $8.8 billion in the balance of payments in the first half of the year, increasing by about 24% from $7.1 billion in the same period last year. But with the number of tourists factored in, revenues per tourist fell to $660 from $680 in the first half of 2018, suggesting that tour packages were sold on discounted prices.
In economic studies pioneered by Indian-born American scholar Jagdish Bhagwati, the phenomenon resulting from cutting prices on goods and services for the foreign market to minimize losses from a shrinking domestic market, which often happens in times of crisis marked by rising hard currency prices, is described as “immiserizing” exports or “immiserizing” tourism. With imports becoming more expensive due to increased foreign exchange prices and exports and tourism going on the cheap, unit export prices fall well behind unit import prices, resulting in value loss for producers. In a sense, the losses incurred through foreign trade prices provide an answer to those who care to ask, “Growth — but at what price?” and look at the other side of the coin.