The Year Of Economic Surprises For Turkey

I summarized the Turkish economy in 2012 in my latest Hurriyet Daily New (HDN) column, as best I could within the confines of 500 words… There won’t be too many revelations if you follow the Turkish economy closely, or even remotely, but if you are not following it at all, it may be worth five minutes of your time.

I just have three additional points, one general and two specific. Starting with the general, going through my HDN op-eds in 2012 in preparation for the column, I stumbled upon a very infamous piece of mine from July, where I had predicted the Central Bank’s rate cuts would not continue, and therefore, the rally in government bonds would be short-lived. A major mistake on my part, considering what happened after that:

Uppssss!!!! But I then remembered why I had made that comment: I was just reporting what the Central Bank was saying: “We won’t ease much further because we would like to bring inflation as close to 5 percent at possible.”

Now, by merely looking at data, you may argue that the Bank loosened policy because it noticed inflation was on a downward trend. But that is not the case at all. As I note in the column, the Central Bank was projecting year-end inflation at 7.4 percent in end-October’s Inflation Report- that’s why the inflation forecast in the government’s Medium-Term Program released earlier in October was 7.4 percent. Inflation dropped sharply in the last three months of the year because of very mild food inflation.

So the point is: The Central Bank eased during the summer knowing that inflation would end up above 7 percent. And so the Central Bank does not target inflation anymore. There is nothing wrong with that; you may argue inflation targeting does not make sense for Turkey anymore. BUT then the Central Bank should just admit that rather than claim they are doing “modern inflation targeting”…

Speaking of inflation, there are several reasons I am concerned about inflation going forward. One is of course a possible reversal in food inflation. As for others, I’ll quote Murat Ucer of GlobalSource Partners and Turkey Data Monitor:

Core inflation, as measured by the popular I-index, edged up a little, partly as a result of lira leveling off in the background ; non-food inflation, we estimate, dropped only modestly to 7.1%, from 7.2% a month earlier and remains elevated, and inflation in various service sub-categories looks sticky and rather high as well. We have just shared our thoughts on the inflation outlook and offered our year-end inflation forecast in our latest Quarterly (of December 28, 2012), which is in the 6.5%-7% range (6.7% to be precise). There, we argued that the Bank’s 5.3% forecast is difficult to achieve for a number of reasons like, among others, base effects, food price reversals, ongoing inflation stickiness, and fiscally-driven tax and price increases (including the recent adjustment to tobacco taxes).

One point I would add to Murat is that commodity prices have been very favorable in 2012 as well. Other than that, Inan Demir, chief economist of Finansbank, makes a really good point by noting that of the 4.3 percent fall in inflation from 2011 to 2012 (end-year), 3.1 percent came from food and tobacco. And this was in a year when the economy slowed down from 8.5 to less than 3 percent, i.e. demand conditions were favorable for inflation dynamics, and the real exchange rate appreciated some 10 percent, i.e. the exchange rate was supportive of inflation as well…

By the way, I have an HDN column on my 2013 outlook coming up, but just to give you a bit of scoop, the first data of the year offer a glimpse to what is on my mind. I had warned in an earlier post that exports were likely to slow down in the coming months. Preliminary exports data from Turkish Exporters Association, which were released on the first day of the new year, confirmed my worries:

More on that (and more) in my 2013 outlook column…