Growth Is No Surprise, But What About the Inflation?…

As we could roughly guess what the growth figure would be, the result was not a surprise at all. We were already observing the effects of Capacity Utilization, Industry Index and Exports, but also the factors affecting effective demand, that is household consumption, seem to have played an important part in this outcome.

The decline in construction business is quite noticeable. While the supply is shrinking, the increase in demand and favourable interest rates obviously push housing prices further up. Although industrial growth has lagged far behind services in terms of performance, the insufficient increase in agriculture is indeed alarming. Not to mention that the seasonal growth also turned to be lower than expected.

Undoubtedly, the most exciting development of the week will be the release of inflation figures. The stress will increase gradually starting from tomorrow, for two reasons:

  • As inflation constantly goes up, policy rates and low market rates do not let exchange rates do down, or at least remain stable
  • Considering that there is serious distrust towards the numbers announced by TurkStat, each announcement fuels the discussions even further.

As I said yesterday, recently, I was on a book-signing tour around Turkey. During my tour, I was quite intrigued by the fact that almost everyone who attended these book signing events, regardless of their political views and affiliation, showed me some documents evidencing one-year price changes at the supermarkets where they shop for their weekly groceries. Based on the evidence, prices seem to have gone up by at least 200%. The real-life prices are completely different than the official annual price rise of 70%. In this regard, we cannot blame bankers for having concerns about the inflation-indexed securities.

“Low interest rate might accelerate the escape of deposits from banks…”

Let’s think about it this way: exchange rates have increased by nearly 100% in a one-year period, but interest rates on bank deposits are around 15-16%. Holders of FX rate-protected deposits might be able to hedge themselves to some extent, but they will never be able to recover their past losses. Also, since term deposits usually carry short-term maturities in Turkey (30-40 days), a 3-month term FX rate-hedged deposit account will not prevent investors from turning to foreign currency. Given the fact that inflation-linked bonds seem like they can yield a return of 40% or higher in one-year term, at least, investors may also show great interest in this type of investment.

If it may be possible to convert the FX rate-hedged deposits to inflation-linked securities without making any cuts, both the operation would proceed smoothly, and the short-term liabilities of the Treasury will be turned into long-term ones. The conversion of short-term debts into long-term is something that Turkey should do periodically. Still, I’m not sure which one would create a bigger gap. FX rate-hedged deposits or inflation-indexed securities? If we the Government can show that it is determined to fight inflation, exchange rates and interest rates will automatically go down. So, the reason for the issuance of this instrument must be the fact that inflation will not go away soon, and the short-term debt of the Treasury increases considerably. In other words, inflation-indexed securities seem like an “emergency proposal” just like FX-rate hedged deposits.

Honestly, I am looking at people’s approaches towards this instrument rather than the technical aspect of it. I do not believe that “emergency instruments” will improve Turkey’s current economic conditions unless the monetary policy is allowed to do its intended work. However, our government seems like it does not want to deal with this problem, not before the elections are over and the results are out. In the meantime, inflation-indexed securities will be expected to dress the wound. However, if they cause an escape of deposits, its harmful effects will be greater than its intended benefits. I wanted to warn again.

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