Expectations and results

THE ECONOMIC path taken since last autumn, intended to stimulate production and consumption by reducing interest rates, decreasing imports due to the increase in foreign goods, increasing exports with the competitive advantage of cheap TL, improving the current account balance, and accelerating growth has not met expectations so far.

After the interest rate was pulled below inflation, the exchange rate began to rise. As input prices increased in TL terms, inflation also started to rise. Since the cost of using credit remained below inflation, the demand for credit increased rapidly. As deposits ceased to be a convenient tool for making use of savings due to falling interest rates, savers began to direct their savings to houses, cars and land. The price of these commodities began to rise rapidly.

Increasing credit usage started to increase imports as well. An out-of-control foreign development fueled this process: when Russia attacked Ukraine, energy and grain prices began to climb rapidly. This spurred Turkey’s imports at once. Since we import energy by necessity, the rise in natural gas and oil prices both disrupted the foreign trade balance, and increased not only the energy bill but also the costs in all areas where oil and natural gas were important inputs.

The rate of increase in imports rose to almost twice the rate of increase in exports. The foreign trade deficit and current account deficit grew, contrary to expectations. From hairdressers to transportation, from rent to supermarkets, prices have increased drastically across the board. The cost of living has become the number one item on the agenda. Although the consumer confidence index has made weak increases from time to time, its direction has turned down in general. It decreased to a historic low in the latest data announced in June, and was low in six of the last nine months. Currently, people have weaker expectations than ever before, both for their own financial situation and for the country’s economy. (See table: Expectations and results)

When the economic management started to reduce the interest rates below the inflation rate, the global economic climate had not started to slow yet, but the signs of the cool down were there. The process of lowering interest rates began right as it became necessary to introduce tighter monetary policy. Moreover, foreign exchange reserves were not at a level that could easily sustain such a process.

The measures taken against global tightening and rise in inflation were long-standing foreign exchange sales, changes in required reserve ratios, FX-protected deposits, revenue-indexed bonds, and finally, the obligation to exchange foreign currency for loan use.

One point needs to be underlined in this outlook. An unavoidable external factor, the rise in commodity prices due to the Russia-Ukraine War, dealt an unexpected blow to the Turkish economy. The rise in energy prices spiked all production costs and accelerated the deterioration in the current account balance and foreign exchange demand. In other words, even if everything was done as it should have been, the economy would be subject to a negative shock. But our soft bellies and policy choices negatively differentiated Turkey from other countries.

This is the situation we are in as of today. Even if there is no new shock in the global conjuncture, the current trend shows that monetary tightening will continue and interest rates will increase worldwide. While the cost of external borrowing is quite high due to our CDS premiums, which are above 800 points, the increase in the base interest rate alone means that our borrowing is more expensive. For this reason, Turkey needs to equip itself with more powerful and effective tools. The global conjuncture may be more shocking in the upcoming period than what we’ve seen thus far.

JUNE INFLATION

We start the week with June inflation data. The partial decline in the exchange rate in the last week of the

month has not yet been reflected in prices. However, we are in a short-term period of decline in commodity prices, and if this continues for several months, it may cause partial relief. However, due to the price hikes in the last month, we will again see a high inflation outlook on Monday morning. (See graph: Inflation)

Although the reduction in fuel prices due to the decline in oil prices in the second half of the month will slow the pace of the CPI, we may see an increase of more than 2% on a monthly basis.

Inflation continues to rise in the U.S. and the EU, and this has caused central banks to start raising interest rates faster and with larger steps than expected. For this reason, the worry of high inflation in recent months has started to be replaced by recession concerns.

JUNE FOREIGN TRADE

Another piece of data we will receive this week is the temporary foreign trade data for June. The data, which will be announced by Minister of Trade Mehmet Mus, is important in terms of the rate of increase.

While our exports increased by 20.4% in the first five months of the year, our imports increased by 40.9%. The reason for the faster increase in imports is the rise in commodity prices and the revival of demand for imported goods with the increase in credit use (although it has weakened a little in recent months).

Most of the increase in exports came from the growth in our markets and from commodity price increases.

However, as imports increased much faster than exports, the annualized foreign trade deficit, which decreased to USD 25bn in 2019, increased to over USD 71bn in May. (See graph: Foreign trade)

In the near future, we will see more moderate increases in both exports and imports. Both will continue to rise, but slower than in the first five months as global growth begins to slow and commodity prices retreat.