Perfect storm brewing on top of economic headwinds
This week’s domestic data released extinguished hopes that the economy was on a recovery path, while other developments once again highlighted global economic risks that could affect Turkey.
Many analysts concentrated on trade statistics, which were, in my opinion, the least negative figures in a dismal data week. For one thing, part of the annual 18.8 percent fall in exports in May is due to the euro-dollar exchange rate. Turkey’s exports to Europe in euros have actually risen slightly since the beginning of the year.
Similarly, the fall in imports is because of low oil prices, as well as the slowdown in the economy. In fact, in volume terms, neither imports nor exports have contracted significantly since the beginning of the year.
However, annual exports to Iraq and Russia fell 37.2 and 40.1 percent, respectively, in May. Economic problems in the latter are likely to result in a disappointing tourism season: Even with the 26.4 percent rise in Germans, the total number of tourists visiting Turkey fell 2.5 percent on the back of the 27.9 percent fall in Russians.
Interestingly, the number of Britons visiting Turkey fell 4.8 percent. Most hotels in Marmaris, where I am writing this column, have lower occupancy rates compared to last year. Neighboring Turunç looked like a ghost town last Sunday [June 28].
Tour operators told me Brits are flocking to Greece, where hotels have slashed prices. Combined with a weak euro, Greece is now probably looks attractive. Turkey will probably end up stealing some tourists from Tunisia after the deadly terrorist attack there, and hotels are aggressively pursuing new markets such as Iran but I doubt this will be enough.
Other economic data released during the week extinguished hopes of an even limited economic recovery. For example, the purchasing managers’ index (PMI) slipped again below the threshold of 50 in June, indicating contraction in Turkey’s manufacturing sector.
Similarly, the Turkish Statistical Institute (TUİK)’s economic confidence index fell in June. The only sub-index that registered a meaningful increase was consumer confidence. Business channel CNBC-e’s own consumer confidence index also rose, whereas the index of Ankara think-tank the Economic Policy Research Foundation of Turkey (TEPAV) confirmed stagnancy in retail confidence.
Coalition talks will be key to consumer and business confidence in the next couple of months. A strong government is especially important, given the global developments: In addition to Syria, the possibility of a Chinese equity meltdown, a surge in oil prices if the nuclear deal with Iran falls through and Greece’s crisis, are all major short-term risks.
Even if none of these happen, the U.S. monetary policy could hit vulnerable emerging markets like Turkey hard. You should not be deceived by the relief from yesterday’s weaker-than-expected payrolls: Economics consultancy Capital Economics argues that it is hard to be upbeat on Turkey, as the Fed’s tightening could trigger a repeat of the “taper tantrum” of 2013. If any of the other risks happen as well, it could be the perfect storm for Turkey, in market pundit Atilla Yeşilada’s words.
A strong coalition government and economy team could weather this storm and sail the ship, despite the headwinds. A lame-duck government preparing for elections would probably steer it directly into the cliffs.