Turkey outperformed most of the countries which have announced huge stimulus packages to prevent pandemic related unemployment by growing 6.7% in the third quarter of the year. It would not be wrong to say that this growth is not a measure of welfare, and is also the most objectionable data of the country since it puts many risk factors into play.
Before examining the growth composition, one should remind that the base impact due to the weak 0.9% of growth rate experienced in the third quarter of last year. For this reason, one should not ignore the positive contribution of the base effect.
Let’s take a look at the details of the growth in the third quarter, when the hasty opening steps were taken and the impact of deferred demands was felt intensely;
9.2% increase in consumption expenditures, also with the effect of the record credit boom, was the factor that contributed to growth the most with 5.2 points. The record increase of 22.5% in investment expenditures contributed 5.1 points to growth. While uncertainties regarding the epidemic continue in the third quarter of the year, the impact of the base effect becomes more important in the rapid rise in investments, as the decline in investments in the same period of last year was the main factor that dropped growth numbers.
When diving deep in investment expenditures, the 23.5% increase in machinery and equipment investments draws attention. One of the reasons that may cause this increase is the possibility that producers may have added to stocks due to low interest rates and the expectation that the exchange rate will increase.
Due to the high share of imported intermediate/raw material inputs in Turkey’s production structure, increase in consumption and investment expenditures based on the credit boom was reflected in imports with a 15% increase. As Turkish tourism sector lost one of the most important period of time in the year, service exports continued to contribute negatively to growth and exports decreased by 22%. For this reason, foreign trade was the expenditure item that had the highest negative impact on the growth data in Q3 with 9.1 points.
Thus, the thesis of “competitive exchange rate being beneficial to foreign trade”, which has been put forward recently by ex-economy czar Mr Albayrak, has once again been falsified.
On the other hand public expenditures made a limited contribution of 0.1 points with an increase of 1.1%.
When looking at the growth from the production side, we see that the industry, agriculture and finance sectors contribute significantly to growth with increases of 8%, 6.2% and 41%, respectively.
In addition, construction sector made a positive contribution to growth for the first time in eight quarters with the 6.4% increase. However, the 0.8% increase from the service sector, which is one of the sectors most affected by the pandemic and constitutes an important part of the economy, did not make a sufficient contribution to the growth.
“Interest is the cause, inflation is the result”
Turkey positively decoupled from G-20 countries in Q3 in terms of growth despite offering very limited financial incentives thanks to record credit expansion. However, the macro imbalance created by this development dragged the country into the abyss. As the low interest environment provided for growth based on credit expansion, the “interest rates cause inflation” theory, which became the slogan of the period despite the unfavorable inflation background in the country, was tested in an expensive way.
In countries that are dependent on foreign intermediate/raw material inputs such as Turkey, inflation mostly runs parallel with the changes in currency exchange rate. The low interest rate environment which was created to keep the economic activity alive while the TL was experiencing a devastating devaluation, ignored the reality of inflation in the country. With the “interest is the cause, inflation is the result” discourse becoming the slogan, Turkey insisted on low interest rates.
The fact that the CBRT, whose main objective is to achieve price stability, clearly deviates from the target and prioritizes growth due to political motivation, has caused it to face a serious credibility problem.
Intervening to prevent increases in exchange rates by selling foreign exchange through public banks was one of the riskiest strategies of the period. This risky strategy was supported by restrictions on swap transactions. In order to keep the exchange rate stable, foreigners were restricted from obtaining speculative gain by borrowing TL and buying dollars. This situation caused foreign capital to escape from the country and the current account deficit could not be financed with foreign investment a.k.a “hot money”. These steps, while already experiencing record declines in goods and services exports and were not yet included in any swap line, created extra stress in dollar liquidity.
Growth figures in Turkey for a long time considered as a single number that summarizes everything, was being held superior to other macro-economic factors. Despite instantaneous policies put forward to save the day during the pandemic process & mindset does not care about whether the selected growth model is sustainable or not, a high growth data was reached, but all other economic parameters were turned upside down.
At the end of the day, although Turkey has an economy growing by 6.7%, we experienced a period of time where Turkey faced record number of declines in employment rate.
Even though the current picture required a decisive and comprehensive monetary policy tightening much earlier than today, finally the brakes were put on by the new Economy and Central Bank administration at the end of the year. Although the market welcomes the statements of new appointees to economic management aiming at long-term macro stability, they will need to display an unprecedented effort to achieve credibility due to the debris they took over and the trust issues in the market.
As a result, third quarter growth based on excessive credit expansion will be replaced by slower growth in the fourth quarter.
However, since the fourth quarter will be a period with full of restrictions due to pandemic, fiscal policy should not be accompanied by a tight stance in monetary policy. This practice, which seems contradictory, is essential for the service sector, which covers a significant part of the economy and is severely affected by the pandemic. The service sector, which is not getting enough financial support, is now more vulnerable to restrictions than at the beginning of the epidemic.
For this reason, the financial incentive package, which includes concrete grants, should be operated in a way that does not exclude anyone, taking into account the rate of unregistered work in the sector. Otherwise, service sector that goes through the fourth quarter without any support may create a deeper employment and private sector debt crisis in the end.
Firuze Nazli Çirkin