Suffering through 2023… Welcoming 2024…
As parents, we can only try to empathise with mothers and fathers who have recently lost their sons to terror attacks in northern Iraq. But we would never be able to comprehend the magnitude of the pain they feel. No form of expression would suffice to show our gratitude to those who gave their lives outside our borders to protect us and our homeland.
Life goes on for us who are alive. We continue to talk about problems that don’t matter at all to those who lost their loved ones. So, although I was not quite eager to discuss economy today, here I am offering you, my readers, the first commentary of the week in order to keep you informed and up to date.
The Central Bank press release last month included some rather confusing statements. That’s why I said, “The year comes to an end with 40% inflation.” However, a day later, the things I heard made me decide to alter my comment as follows.
“…According to the managers of some private banks, ‘If the policy interest rates are pushed to 42.5%, they will be in the real interest rate territory’, but we all know that this is not the case. As the CBRT hikes rates, CDS premiums go down along with the cost of external financing. Banks seem like they are encouraging Central Bank officials to reduce the cost of syndicated loans. Because, they know better than any of us that it is not easy to run a successful business with the current interest rates…”
Indeed, last week the CBRT hikes rates once again, also implying that they might do it again before the elections. Clearly, since the Central Bank was late to increase interest rates, inflation will continue to rise as interest rates will never exceed the inflation rate. Meanwhile, our GDP growth will slow down. In Turkish industry and commerce, only a few large companies are provided with easy credit facilities. With interest rates remaining at quite high levels, the demand for loans will decrease and companies that want to get a loan will be the ones with high risk profiles.
In the meantime, outstanding swaps deducted, the Central Bank’s net forex reserves has risen further into positive territory, currently standing at $39 billion. Considering USD/TRY exchange rate trend and the money movement in the market, we see that this climb did not occur merely because the CBRT bought dollars from the market. Obviously, there has been a modification in the calculation method. Whatever the reason might be, this certainly is a positive development. It is a good thing that the Central Bank puts foreign money at least as large as our trade deficit into its reserves, which will make our economy stronger and help reduce our high levels of “external vulnerability”, otherwise known as the “side effects of the high and volatile exchange rates”.
However, the fact that the CBRT spends its newly replenished reserves in order to prevent FX rates from rising the during the electoral campaign of the ruling party will, of course, cause expectations to slip into negative territory again. For some reason, too much meaning is attached to each and every development, either small or big. Setting the expectation bar too high almost always leads to disappointment and frustration. Central Bank should pay attention to this important detail is it wants to manage expectations properly.
