What will happen in this year’s second half? (Part II) - HATICE KARAHAN

What will happen in this year’s second half? (Part II)

We took a short break from our data analyses during the Bayram holiday period. Let us return to where we left off and try to understand what is happening during the second half of the year. In the first article on this subject, I had emphasized that net exports were weakening based on foreign trade statistics. There is a trend toward a decrease in activity for exports and increased activity in imports for the 3rd quarter. This development is not a pleasant one, since our growth in 2014 was heavily reliant on foreign trade. Of course, one aspect of this reflects on the current account deficit. Let us start with that today.

THE CURRENT ACCOUNT  DEFICIT IS CENTRAL TO THE ISSUE

We had analyzed the situation of the current account deficit in this column previously. The dynamics associated with growth linked to net exports in 2014 allowed for a healthy reduction in the deficit. Let’s be honest. That is how it was! During the first 7-month period, we saw a year-on-year based reduction of 38.3 percent.

However, we were disappointed with the worsening of the foreign trade gap in August. That is why it will be critically vital for exports to perform strongly during the 4th quarter, which we have already entered, in regard to both growth and the current account deficit.

Even though the deficit was reduced, it still remains as one of our prominent problems. That is because it contains within it structural factors that need our attention for mid- and long-term solutions. That is also why we barely manage to keep our head afloat, because we have to face the truth of needing to finance it. When it comes to the part of financing the deficit, a number of dynamics are at play. Let us take a look at that aspect.

CAPITAL INFLOWS AND RISKS ARE VOLATILE 

Due to a certain reduction of risks in the 2nd quarter, we registered progress in financing and were relieved to an extent when it came to the balance of payments during the first half of the year. This changed with data from July, which suggests a loss of steam.

It doesn’t come as a surprise that the appetite for risks in global markets will fluctuate in the 2nd half of the year, given the constant news from the FED and the incessant continuation of geopolitical tensions, added to the indifferent trend of global growth. This situation results in fluctuations for us when it comes to capital inflows and the financing of the deficit, and will continue to do so.    

When we look at the risk outlook, we see that CDS premiums are once again maintaining an upward movement. The premiums that exceeded 200 basis points prior to Bayram are fluctuating around those same levels. The tensions we have experienced during the past few days will add oil to the fire. That is why I think it would be too optimistic to think that there will be a positive outlook for financing during the 2nd half of the year given the increased tensions.

 A TRADE-OFF EXISTS IN WHICHEVER DIRECTION WE PROCEED IN

On the other hand, we are not in a position to withstand capital flight either. The activity in the exchange rates, everyone is aware… we also need a stable trend in the currency markets.

Inflation remains a stubborn problem sitting on top of our heads despite dropping to a rate of 8.86 percent in September. We can’t save ourselves from the inflationary pressure on foodstuffs! While we gain hope from dropping commodity prices, it is dashed by rises in energy prices. It is difficult to restrain inflation when the exchange rates are on the move. 

When all of these are put together, we can see that the hands of the Central Bank have not been relieved yet. That is why it looks as if its tight monetary policy will continue for a while yet. With this conjuncture, it will not be easy to reduce interest rates.

Yes, we are filled with worry, particularly when we remember investments as well. However, as I have tried to express as well as I can in the limited space of this column, we are faced with a trade-off whichever direction we turn toward…  

Let me summarize. Given the negative symptoms for foreign trade in the 2nd half of the year, the signals are that the contribution of net exports to growth will be lower while domestic demand will show signs of reviving. 

That means the conclusion we can reach is that the conjunctural downward pull will in high probability result in a modest rate of progress…

Along with this, we could witness the strengthening of exports in the 4th quarter, particularly if the Iraqi market continues to normalize. However, developments in Europe will also be a major factor. If we don’t witness an efficient pace in export growth, it could result in the slowdown of improving the current account deficit. We will also need to take on other tough areas such as increasing risks, capital movements, exchange rates and inflation during the final quarter.

The Middle Term Plan expectation announced by the prime minister on Wednesday contains similar messages to our analysis. The MTP foresees a growth rate of 3.3 percent for 2014. Expectations for year-end inflation are 9.4 percent… the ratio of the current account deficit to GDP is expected to be 5.7 percent this year.

And finally, let me add: Babacan emphasized that priority number one will be inflation and will be followed by the current account deficit. The economy administrators face a tough job, particularly the Central Bank.

Let’s say that the phrase “running a central bank is both a science and an art” was not said for nothing. And with this thought, let’s draw our analysis and this week to an end.
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