A tale of two countries
I recently stumbled upon a really good summary of Turkish monetary policy outlook for 2013, which I would like to share here:
“Economist Ali Can Paragöz said inflationary pressures are growing and by mid-2013 inflation will threaten not just to miss the official 5 percent target, but also to exceed the 7 percent upper limit of the central bank’s band.
Prime Minister Recep Tayyip Erdoğan ‘seems to think inflation above the target is not a problem,’ Paragöz said. As a result, he said, policymakers will first use macroprudential measures to limit inflation. He referred to Erdoğan rather than Central Bank President Erdem Başçı on monetary policy because ‘the political influence on the Central Bank is quite clear.’
Ahmet Tutsatçı, a strategist at the Istanbul brokerage Parasızlar, said this political influence will keep the Monetary Policy Committee from raising rates at all in 2013. ‘They will take all the macroprudential measures they can instead,’ he explained, citing bank reserve requirements, taxes on bank loans and restrictions on maturities for consumer credit as likely measures.”
This excerpt is actually from an article on Brazil, not Turkey. I read it during my flight to São Paulo on Feb. 6 for a three-week vacation in South America. I will be writing about the economies of the countries on my itinerary while at the same time continuing with my Turkey coverage.
Anyway, I replaced the Brazilian names with Turkish ones and changed the inflation target and upper limit, which are both 0.5 percentage points higher in Turkey. I shortened the original text but did not touch anything else. And yet I probably managed to fool even my Turkey economist readers.
The similarities do not end there. Both countries probably had the largest declines in relative growth within emerging markets in 2012 and both cut policy rates, although Turkey more aggressively. And yet the Istanbul Stock Exchange had one of the best equity performances and Brazil’s Bovespa the worst.
Goldman Sachs analysts find that 60 percent of Brazil’s underperformance relative to Turkey last year was due to lower earnings, while the rest because of the weaker currency. But Goldman does not have a good answer to what caused the lower earnings.
I can offer a partial answer. The inflation outlook is challenging in both countries. January inflation surprised Turkey on Feb. 4, jumping to 7.3 percent (yearly) from 6.1 percent in December. The same statistic, released on Feb. 7, turned out to be 6.2 percent in Brazil, up from 5.8 percent the previous month, as prices rose at the fastest pace in nearly eight years.
The key difference between the two countries is growth: While Turkish growth is expected to slow down to 2.5-3 percent in 2012 from 5 percent in 2011, my blog’s host Roubini Global Economics sees Brazil’s economy expanding just 1 percent in 2012, down from 2.7 percent in 2011.
This toxic combination of low growth and high inflation is called stagflation. I am glad that Turkey is far from that territory.