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Saturday, December 18, 2010

New Turkey’s economic outlook for 2011

Turkey’s economic outlook for 2011 ; There has been a distinctly superb performance in 2010, as economic activity has achieved a sharp rebound, making up for the much severer collapse than other countries during the crisis. However, the third quarter’s GDP figures suggest that output has exceeded pre-crisis levels and the recovery pace would likely enter into a slower trajectory in 2011. Under this broad picture:

1. Growth:
I envisage that the economy will post a slower 5 percent growth next year, after expanding by a robust 8 percent this year.

2. Unemployment Rate :
The downtrend in unemployment rate is likely to slow next year in tandem with softer economic growth. Due to the high rate of growth in population at 1.5 percent and to the migration of labor force from agricultural sector to other sectors, only a limited 0.5 percentage point drop in unemployment rate to 11.4 percent can accompany the 5.0 percent economic growth I estimate for next year.

3. Current Account Deficit and External Financing:
I expect the deficit to expand to $50.5 billion (5.8 percent of GDP) from an estimated $44.9 billion (5.9 percent of GDP) this year. Recall that Turkey has experienced such large deficits before. However, back then, the long-term capital flows were the key financing tool, whereas today’s portfolio inflows constitute the major source. In my opinion, unless Turkey’s growth prospects are impaired and the government deviates from the fiscal framework depicted in the Medium-Term Program, there is a great deal of chance that Turkey will be upgraded to the investment grade category next year. Such a rating move would improve Turkey’s risk profile, bolstering long-term loans and foreign direct investment to the country. In that sense, I am less worried about the vulnerability of the current account deficit financing.

4. Inflation:
In line with the slowdown in GDP, the inflation outlook shall remain benign. Note that core inflation has been surfacing at a record low 2.5 percent over the last two months, despite headline CPI being boosted by earlier tax adjustments and recent rises in food prices. However, with the partial correction in food prices in November, the annual CPI receded to 7.3 percent. The CPI is set to keep heading south in the upcoming months, easing even below 5 percent by February. Such a gigantic fall is linked to the high base year effect and the decline is set to be replaced by a slight up trend later in the year, bringing the CPI to 6 percent by the end of 2011.

Panacea for current account deficit

At a conference on Dec. 11, Central Bank Deputy Gov. Erdem Başçı, one of the favorite candidates for the governor’s post in the next term, said a further measured reduction in short-term interest rates to discourage portfolio inflows and tighter prudential measures to slowdown loan growth appear as the optimal policy combination for the Central Bank against the towering current account deficit in Turkey. Although it was unclear until Thursday’s monthly meeting whether this view has gathered support of other members of the Monetary Policy Commitee, especially Gov. Durmuş Yılmaz, it would be a big rhetoric change for our Central Bank, which many times underlined its indifference to the level of currency.

In Central Bank we trust

The bank assumes the net effect of its ideal policy mix to be a tighter monetary stance. However, measuring how much increase in required reserve ratios would be enough to offset the interest rate cut is not very straightforward and the Central Bank’s credibility in the eyes of market players would play an important role. We believe the Central Bank has gained enough credibility during the global crisis and do not expect any problem on this side. Otherwise, the impact would be higher long-term yields due to higher inflation expectations. However, the current market reaction is a reduction in the bond yields especially of up to one-year maturity, while the longer end of the curve remained broadly unchanged. We envisage that if the Central Bank happens to adopt this new monetary policy stance and starts cutting policy rate, the 10-year bond yield and the swap rates would ease gradually, as well. For the latest updates PRESS CTR + D or visit Stock Market news Today

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