Page 45 - bne_Magazine_July_2017

bne July 2017 Southeast Europe I 45
Exports jumped 10.6% y/y due
to stronger demand from Europe
and imports edged up 0.8% y/y
in the quarter, even though the
lira weakened against the major currencies. But, worryingly, gross fixed capital formation increased
by only 2.2% despite the Credit Guarantee Fund (CGF) scheme the government introduced in December last year to encourage investments. Machinery investments plunged 10% y/y in the quarter, deepening from the 0.4% y/y and 3.9% y/y contractions registered in Q3 and Q4 last year.
On the supply side, agricultural production rose by 3.2% y/y, while industrial and manufacturing output moved up by 5% y/y and 5.1% y/y, respectively. The construction sector expanded at 3.7% y/y while the services sector registered 5.2% y/y growth across January-March.
Meanwhile, as one of the side effects
of the spike in government spending, Turkey’s budget deficit has widened. According to finance ministry data, the central government budget ran a deficit of TRY11.5bn in January-May versus the TRY9.07bn surplus in the same period of last year.
Analysts at the Institute of International Finance (IIF) and Citi are also cautious about growth prospects even though they admit that the country’s economic performance has been much stronger than they anticipated at the beginning of the year.
For instance, Ugras Utku and Yalcin Oney at the IIF argued in a June 12 report that the favourable impact
of the CGF and the temporary tax cuts are expected to support the economy until the final quarter of this year. The IIF forecasts that Turk- ish economic growth will accelerate to 4.2% this year from last year’s 2.9%, but slow to 3.5% in 2018.
JP Morgan expects growth to remain relatively low at around 3% in the second quarter. The investment bank, however, maintained its growth forecast for 2017 at 3.3% after the data release.
Similarly, Citi thinks that it would be difficult for policymakers to continue to provide “a similar kind of stimulus next year and thereafter without undermin- ing market sentiment”.
According to Citi, the government should also focus on reducing inflation, which is harmful to growth, and “avoid a further increase in the share of construc- tion in the economy”.
The government set up a sovereign wealth fund last year to finance mega infrastructure projects that it believes can fire up the economy. In an interview in April, PM Binali Yildirim vowed to keep pumping money into large construction projects to boost economic growth.
“All in all, while the Q1 GDP outturn
is encouraging, a growth rate of about 3.5% per annum can no longer be taken for granted without tackling the noted structural challenges and buttressing macroeconomic stability,” Citi wrote in a report published on June 12.
Flying in the face of sceptical assessments of the economic outlook offered by several analysts, Deputy PM Mehmet Simsek suggested that leading indicators point to stronger economic growth in the second quarter than in the first. Development Minister Lutfi Elvan, meanwhile, sounded more upbeat on the growth outlook, arguing that 2017 GDP growth could exceed the 4.4% target.
According to Yesilada at GlobalSource Partners, global risk appetite is the big- gest driver of economic optimism. The IIF expects portfolio inflows to emerging markets to hit a three-year high in 2017.
“The central bank still retains a pro- growth bias but a hawkish statement from the Fed FOMC [Federal Open Market Committee] and the decision by [opposition party] CHP chairman [Kemal] Kilicdaroglu to start a long protest march, which might be one of the factors that have modestly upset the currency market, forced its hand to remain tight,” Yesilada told bne Intellinews.
As universally expected, the central bank on June 15 left its policy rates unchanged.
The national lender kept its one-week repo (8%), overnight lending (9.25%) and borrowing (7.25%) rates on hold. The late liquidity window rate, which has been used by commercial banks for about 90% of recent funding, was main- tained at 12.25%.
“The monetary policy is moderately tight but not tight enough to contain inflationary pressures, which are only moderating because of a stale TRY,” according to Yesilada.
“Current inflows are not sufficient to trigger further TRY appreciation, mean- ing that the central bank will have to keep the effective funding rate at 12% for the foreseeable future.”
The lira gained more than 3% against the dollar between May 18 and June 16.
Turkey’s annual inflation rate edged down to 11.72% in May from the near nine-year high of 11.87% recorded for April. The central bank said it believed inflation may have already peaked and will only fall from now on this year.
“The Turkish growth spurt will peter out at the latest by Q4 2017”
There has been an overall inflow of $3.06bn into Turkish government debt securities in the year to date while the total equities inflow tops $2.2bn, the central bank reported on June 15.
Following its monetary policy commit- tee meeting on June 15, the regulator vowed to keep monetary policy tight until there is a significant improvement in the inflation dynamics.
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