What the Fund Has to Say on the Turkish Economy
The IMF just released the press information notice (PIN) from the recent Turkey Article IV Board Meeting. The whole document is rather short, but here are the interesting parts- I underlined the most important/interesting parts:
Balance of Payments:
While the Fund talks about the familiar BOP (and financing the BOP) risks, it also notes that “nonfinancial corporates’ net FX liabilities increased substantially, exposing them to currency depreciation.” Here is the relevant graph, in case you are interested:
“While the headline fiscal balance continues to improve and the public debt-to-GDP ratio is declining, fiscal performance has been supported by benign economic conditions at home and abroad.”
“The primary balance of the nonfinancial public sector continued to improve, largely reflecting buoyant—but transient—tax revenue from the boom in output and imports and proceeds from a tax restructuring scheme, which masked a relaxed fiscal stance.”
It is great to think that I am not the only one thinking “these economists are crazy“, after all:)….- sorry the graphs have “disappeared” because of the revisions to the Daily News web site, but email me if you’d like any of those charts…
Monetary Policy & Inflation:
“Policy responses were insufficient to prevent the development of a large current account deficit and high inflation. Monetary policy shifted to an unconventional mix of reserve requirements, the interest rate corridor, and the policy rate, which has not demonstrated it can deliver price- or financial–stability.”
“Numerous prudential measures aimed at slowing credit growth and building buffers were introduced but, from a macroprudential perspective, were sometimes delayed.”
I think the Fund has in its mind the banking regulator measures of June, which were finally able to slow down credit, when it became apparent that the CBT’s measures were not working.
“Growth is expected to slow sharply to 2 percent in 2012 due to weaker capital inflows, reflecting in part concerns about Turkey’s large current account deficit. More limited foreign financing would constrain the current account deficit to about 8 percent of GDP and compresses imports. In line with Turkey’s previous capital flow-driven corrections, with fewer imports of key raw materials and intermediates, GDP growth is forecast to be sharply scaled down. Inflation is projected to decline to a still-elevated 6½ percent, eroding external competitiveness.”
As I will discuss in next week’s Hurriyet Daily News column, the 6.5 percent 2012 inflation forecast (I am assuming it is end-year) would be possible under in a very positive scenario. In other words, there are more upside risks to that forecast than downside risks.
“Going forward, Directors urged the authorities to rebalance the policy mix to ensure a soft landing, in view of volatile capital flows, a widening current account deficit, and an externally financed credit boom. Tightening the structural fiscal position and gearing macroprudential policies to preventing systemic risk would allow monetary policy to focus on price stability, helping to preserve the credibility of the inflation-targeting framework and strengthen Turkey’s resilience to changes in global liquidity condition.”
“They encouraged the authorities to tighten fiscal policy, with a view to stemming domestic demand, supporting disinflation, while also providing a fiscal buffer in the event capital flows reverse. Directors recommended front loading the adjustment as much as feasible, and establishing fiscal targets in structural terms. They emphasized in particular the need to restrain current spending, expand the tax base to ensure sustainable revenues, and strengthen the oversight of public-private partnerships.”
I love this “structural terms” part. It read, “when the amnesty and such extra one-off revenues are taken out”…
“Directors recommended moving toward a more transparent and consistent monetary policy framework to re-anchor inflation expectations and avoid excessively rapid disintermediation.”
I agree monetary policy needs to be more transparent and consistent. But I am not really sure, especially as a hotelier sick of paying high premiums to middlemen for fruits&vegetables, why disintermediation would be bad for inflation- or just bad if this isn’t about inflation…
“Directors noted the strong performance of the banking sector, but encouraged further efforts to address weaknesses in the financial sector, in particular its vulnerability to an external funding shock and possible deleveraging by banks in the region. They urged caution in implementing near-term measures to bolster banks’ resilience so as to avoid a sharp drop in credit.”
2 Responses to “What the Fund Has to Say on the Turkish Economy”
[...] Author: Emre Deliveli · Dec 7th, 2011 · 1048http%3A%2F%2Fwww.economonitor.com%2Femredeliveli%2F2011%2F12%2F07%2Fwhat-the-fund-has-to-say-on-… [...]
I figured out what the Fund was meaning with disintermediation: Simply decrease in banking activity- I had no idea why my brain blacked out.
Anyway, the Fund has probably implicitly referring to the frequent changes in reserve requirement ratios and the new "funding rate band", which has made banks' funding costs very uncertain…