Four Passover Seder questions
Is the current account adjusting? It is tough to jump to conclusions from one month of data, but the February trade deficit, at $5.9 billion, came in much better than expectations of $6.5 billion. The sharp decline in the non-energy deficit is especially positive. Besides, preliminary export figures from the Turkish Exporters Association are hinting that exports are proving to be relatively resilient.
Then, is the economy rebalancing? Yes and no. If you look at the growth data from the last quarter of 2011, which were released last Monday, this is a no-brainer: Foreign demand contributed a hefty 3.2 percent to growth, which is not very common except in recessions. In contrast, the contribution of domestic demand plunged to 2.4 percent from 9.4 percent in the previous quarter.
But early indicators are hinting that this adjustment may not extend into the second half of this year unless the current policy stance changes. For example, if the lira really “beats the dollar” this year, as Central Bank Governor Erdem Başçı boldly claimed in January, the relative lira strength may start to bite into exports and revive imports.
in all, it is very tough for Turkey to grow 4 percent or so this year, as the
government is envisaging, and bring both the current account deficit and
inflation to the 7 percent range. In a “good scenario”, capital flows may pull
growth above 4 percent, but that would mean certain death to this rebalancing
recent energy price hikes will contribute 0.5-0.6 percent to April inflation,
causing the yearly figure to rise. Inflation will then start its descent in
May, but it is very unlikely to go as low as 6.5 percent, as the Central Bank
How do you feel about the new investment incentive scheme? It is definitely well thought-out and an improvement over the previous one. Tackling the current account deficit by encouraging domestic production of intermediate inputs, most of which are currently imported, is a step in the right direction.
But these measures should not be substitutes for investment climate reform. If Batman (the city, as I am sure Bruce Wayne has his own generator) has frequent electricity outages, an industrialist would think twice before setting up shop there, regardless of the incentives.
Nirtzah, or next year in Jerusalem, and thus I conclude my economic seder.