Three Important Issues…


Since inflation is already an indisputable fact, I leave it to next week and instead, I shall focus this morning on the three most discussed issues.


Growth, Exports, and Interest Rate: These are three important details about the current economy in Turkey. When I say growth, I mean the second quarter growth. Expectations are forming at a higher rate, around 7.6%, when compared to the previous quarter, which covers the months of April, May, and June. We know that during this period, the exchange rates followed a relatively calm course, between 14 and 16 TRY. The markets had not reacted negatively to that level as it was lower than the levels tested in December last year.


In the same period, while the capacity utilization rates in the manufacturing industry were above the 75%, the industrial production index remained at an acceptable level despite losing momentum. There was a slowdown in profit indices in June, as opposed to the previously recorded rapid rise, which was caused by the price increases.


While exports performance hit record high levels almost every month, it will stand out more as a saviour in the 3rd and 4th quarters, in which a slowdown in growth is highly expected. Exports, whose contribution to growth increased while the economy contracted at the beginning of the 2000s, also contributed to economic acceleration in recent years. I expect exports, which sustained Turkey’s economic growth along with private consumption in the first quarter of this year, to retain the same performance until the end of the year. However, it would be useful to be cautious, taking into consideration the problems that are anticipated to hit the European Market. The net contribution of net exports to growth in the last quarter was over three percentage points. We could see a similar result for the second quarter.


“The actions that increase the interest rate should be criticised, not the interest rate itself…”


The interest rate is a complicated issue. Some foreign economists strongly oppose interest rate hikes, adding that steps taken to stop inflation will reduce investments. There are those who believe that the CBRT’s rate cut move was based on a similar argument, but we have not yet seen any positive impact of this decision on the loans. I have to say that there are not any other financial institutions that give out loans with low interest except public banks. In fact, after the decision to cut interest rates, private banks stopped lending funds. I must be said that Eximbank has also fallen silent. Reducing the price of loans when there are no available funds does not unfortunately produce the desired result.


The exchange rates, which we watch with all our attention, tell us that the currently implemented policies create a knife-edge balance. The rapid rise in the foreign currency basket towards the end of the second quarter and the increase in inflation is another factor that makes the interest rate issue more serious. While trying to release the low-cost funds to the market, the fact that the parameters such as CDS premiums, bond interest rates, and the high cost of living as well as global developments have gradually deteriorated Turkey’s economic outlook brought along undesirable side effects. Institutions or individuals who did not want to place their savings in low interest time deposits started to invest their fund in raw materials, intermediate goods, or foreign currency.


As a result, the economy officials in Turkey decided to control the market, which inevitably led to more side effects, placing a greater burden on the Treasury and the Central Bank. At this point, raising interest rates to help reduce inflation would not be beneficial at all, but the financial authorities are trying to help banks make profit by preventing offering deposit rates close to loan rates. However, if deposit rates are allowed to be close to the loan interest rate formed in the market, the inflation could be brought under control without increasing the policy rates. By doing the opposite, we continue to fuel stocking up tendencies and foreign currency demand.


I think the economy officials in Turkey calls the loan rate “cost of funds” and think that it will not harm the implemented policy. However, the warning of foreign experts, which I pointed out earlier, applies here as well. These experts criticize the rise in loan rates. Therefore, they do not support the policy embraced by the CBRT. That is to say, they are against all practices that increase the loan interest rates.