Probability of soft landing is getting slimmer

Exchange rate volatility has always been the main issue that Turkey and other developing countries had to deal with over the years. While this problem has become acute in countries running chronic foreign trade deficit, it’s always been a scary factor even in countries running foreign trade surplus. 

The fact that developed countries have slowly evolved from producers of goods and services into the producers of high technology caused developing countries to become more sensitive about foreign trade deficit. However, in a world where borders gradually disappear, countries could no longer find the chance to protect the value of their currency through the implementation and practice of “national monetary policies”. Anytime exchange rates start going up, investors rush in to invest in Turkey, but whenever a problem arises, they liquidate their investments, convert them into foreign currency and leave the country. This whole situation causes harsh fluctuations in exchange rates, leading to sharp growth-interest rate-inflation movements.

The table below shows a brief history of Foreign Trade since the proclamation of the Republic. The piece was taken from a webpage where Prof. Dr. Mahfi Eğilmez, a fellow faculty member at Altınbaş University, is writing economic commentaries*. Also, in “Olaylarla Türkiye Ekonomisi”** (Milestones in Turkish Economy) that I co-authored with Yalın Alpay, mentions that the last time when Turkey ran foreign trade surplus was in 1946. Although some minor adjustments to exchange rates have been made until that year, Turkish currency was officially devalued for the first time in 1946. In short, a strong connection lies between the value of national currency and foreign trade deficit. However, measures taken so far to prevent national currency depreciation and foreign trade expansion seemed like they failed to achieve their intended target. Devaluations have not been very useful either in helping Turkey take active part in foreign competition.

YearsExportsImportsTrade Deficit

The fact that Turkish imports mainly consist of vital consumers goods with no price elasticity while our exports comprise final goods- what we sell increases consumer price sensitivity while what we buy doesn’t- prevents trade deficit from shrinking. Turkey has to create value added goods and services but, for some reason, the Government keeps protecting sectors that offer low value added activities, providing them financial incentives. So, trade deficit continues to hurt the economy even though exports hit record highs. 

“Should we really be happy to see Foreign Trade Deficit getting smaller?”

There are three reasons lying behind the fact that imports seem like they have slowed down lately: exchange rates, additional customs duties and the declining trust in the administration. As a result, both trade deficit and current account deficit shrink further… Do you know how? It’s because economic growth slows down, which is totally undesired. All these facts tell us that there has not been a significant improvement in economy’s structural problems since the last 15 to 20 years. 

An “instant 10% discount” campaign has taken effect especially now when the Central Bank was left all alone in the fight against the increasing inflation. This campaign, however, won’t be any help in solving the ever ascending PPI problem. Therefore, CBRT is expected to use its interest rate weapon to fight back against inflation as well as higher exchange rates. Following the recent drastic rate hike, tomorrow’s meeting has become more important than ever.

I cannot help but notice that some experts do not seem to care about the adverse effects of interest rate hikes, which might bring unwanted results in terms of funding cost, exchange rates,    and inflation. Each rate hike pushes Turkey into further uncontrolled economic slowdown, which means the probability of soft landing is getting slimmer. In this respect, I am in complete agreement with Professor Mahfi Eğilmez***. He spoke to BBC the other day, stating, “Turkish economy has missed the chance to slow down its economic activity in a controlled manner. Now, the country will have to face uncontrolled recession”. 

The truth is our biggest problem right now involves manufacturing costs. I do not expect consumer prices to instantly drop just because the economy administration has launched some discount campaign. Instead, the Government should take strong actions to lower manufacturing costs. It seems to me that the Government is trying to keep the ship afloat until the local elections.


**Olaylarla Türkiye Ekonomisi; Yalın Alpay, Emre Alkin; Hümanist Yayınları 2017