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46 I Southeast Europe bne July 2017
The central bank also appears to share politicians’ optimism that economic growth will further accelerate due to supportive measures and incentives provided by the government.
The government is encouraging local banks to support economic activity
by offering cheaper loans. This is, however, widely seen as putting overt political pressure on the central bank to cut its rates, thus raising questions over whether it can retain its independence.
President Erdogan, who has declared himself “an enemy of interest rates”, on June 17 once again attacked high rates. “We will continue to intervene in inter-
TUIK’s data collection and estimation methods which overstate growth. In my book, year-on-year growth is no more than 3.5%,” he told bne Intellinews.
JP Morgan calculates that the strength of domestic demand is such that it reduces the need for monetary easing and supports the case for a more cautious stance. The investment bank expects the central bank to start easing in December, in the absence of political pressure for lower rates.
According to Yesilada, the Turkish gov- ernment and regulators need to be mind- ful of 2018, a year when the Fed is to initiate its balance sheet tapering, while
issued for some of Erdogan’s security guards following the brawl that erupted outside the Turkish ambassador's residence last month during the Turkish president’s visit to Washington.
Moreover, the government is now deeply involved in the diplomatic crisis that has blown up between Qatar and several Gulf Cooperation Council (GCC) member states, led by Saudi Arabia and also supported by countries including Egypt. Another difficulty is that the Iraqi Kurds are preparing to hold a referendum
on independence later this year,
a move that could trigger tensions and hostilities across the region.
It is difficult to predict how all these conflicts will unfold and whether
they will affect the Turkish economy. Investors fear that so many domestic tensions and geopolitical risks may distract the government from the urgent structural reforms which are required to address deep-rooted problems such as labour market rigidities and the current account deficit, and put the economy on a sustainable growth path.
Erdogan on June 17 shrugged off concerns over the heavy influence
of domestic consumption in securing economic growth. “Strong domestic demand is only an indication of people’s trust in the country and its economy. All indicators point to a swift recovery”, he said. Declaring that “the worst is over for the economy”, Erdogan called on the rating agencies to upgrade Turkey’s credit ratings
in light of the latest GDP data.
“Europe is awash with money. Foreign capital will keep flowing into Turkey”
est rates,” he said. Erdogan was prob- ably suggesting by that that he would continue to criticise the central bank’s policies.
“In an environment of high interest rates, investment will stop and no new jobs will be created,” he added.
The government is also anxious
about unemployment. It has not fallen significantly despite the GDP expan- sions observed over two consecutive quarters. The ruling AKP wants to see higher growth and lower jobless rates before the 2019 election. That’s why
it is asking the banks to pump more money into the economy through loans.
Nevertheless, as the latest GDP data demonstrated, consumer demand and public spending are functioning as the main drivers of economic growth, not private investment.
“Credit-driven growth booms are not desirable or sustainable, ask China,” observed Yesilada.
He is also sceptical that growth is as robust as the state statistic agency has recorded. “First of all, there are serious errors in [state statistical institute]
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the European Central Bank possibly ends bond purchases. These moves would significantly tighten global financial conditions.
But, Bulent Gedikli, one of Erdogan’s aides, disagrees with this caution. “Europe is awash with money. Foreign capital will keep flowing into Turkey, because for those funds there is nowhere else to go,” Gedikli told
the Aksam newspaper on June 14.
The year to date has been difficult for Turkey. Ankara’s relations with the US are strained over Washington’s support for the Syrian Kurdish YPG militia and the arrest warrants lately
Find more Southeast Europe content at www.bne.eu/southeast-europe
Selected headlines from past month:
· Romania’s new government comes up with radically revised fiscal policy
· New Serbian PM to continue juggling EU ambitions and relations with Russia · EU pursues “positive realpolitik” in the Balkans, says Hahn
· Turkey struggles with the conundrum of Qatar