EconoMonitor

The Kapali Carsi

Turkey: Demystifying Erdoganomics

Before attempting to demystify Erdoganomics, I gues I should define it first: An invention of your friendly neighborhood economist, it refers to Turkish Prime Minister Recep Tayyip Erdogan’s idea that higher rates beget higher inflation.

I was originally thinking about writing on this “interesting” theory for my June 2 Hurriyet Daily News (HDN) column, but then I realized that it is just Erdogan’s “cover”, not his real reason, for low rates. And so I decided to concentrate on why he “really” wants lower rates. I had also got a few questions from reeaders on whether lower rates would be “good” for the economy and what would happen if Erdogan got what he wanted- and so I squeezed those in as well. Anyway, you can read the whole thing at the HDN website. If you are still wondering my take on the theory, and the short explanation I offered in the column was not enough, I can refer you to an old post on the subject.

I would like to start the addendum by commenting on today’s Turkish data in the context of the column. Business channel CNBC-e’s consumer confidence index rose in May, sort of contradicting the official index I referred to in the column. The two usually move together, and so we’ll soon see which is more accurate. Moreover, purchasing managers index fell, weakening the robust production signals from industrial production data I had referred to the in the column. However, I still feel, despite these latest figures, that production is doing much better than consumption.

Moving on, Central Bank of Turkey Governor Erdem Basci made his scheduled presentation to the Council of Ministers today (June 2). The meeting itself was not public, and I am not sure if he heeded my advice to wear running shoes, but his presentation, which was posted on the Central Bank’s website, offers some clues as to what went on inside: For one thing, according to Basci, the economy is set to grow 4 percent this year, inflation will peak in May, credit growth is around 15 percent and the improvement in the current account deficit is expected to continue.

I am sure you are wondering my take on these claims: I don’t think the economy can grow 4 percent this year, not even with ultra-loose monetary policy. Inflation will probably peak in May, but I don’t expect a sharp fall, and the 5 percent end-year target is not possible. As for the current account deficit, yes, it will improve, but even the most optimist forecasters do not expect it to fall below 5-5.5 percent of GDP- which would still leave Turkey vulnerable. And there are several reasons to believe that we may not see a major adjustment, even though the European recovery would help Turkish exports.

I am also sure you are wondering how Basci encountered Erdogan’s pressure for a large rate cut. Here’s Gedik Investment economist Ibrahim Aksoy: “With another graph, the most important one in the presentation in our view, the CBT tried to show the side effects of bold rate cuts, suggests such a move would cause higher inflation. However, in the same graph, another path using measured rate cuts brings the economy to a point where interest rates and inflation would both be lower compared to the point which is a result of sharp rate cuts.” As I told you before, the meeting was closed to the press, so we don’t know if Erdogan bought this:)…

Finally, a couple of footnotes: As for housing glut I mentioned in the column, fellow HDN columnist Mustafa Sonmez has a detailed analysis of the Turkish housing market in his column today. In general, I agree with his analysis. As for my point on Turkey having to drift with global head and tailwinds, Chicago Fed President Charles Evans, speaking at a conference organized by the Central Bank of Turkey today, said that the Fed was expected to complete its tapering by the end of the year…

Last but not the least, I would have preferred Tayyipnomics, but it seems out esteemed PM sees the mention of his name that as an insult. I have no idea why, as it is his real name- I don’t get offended when people call me Emre, after all:) Besides, I would be honored:) if he sued (or jailed) me, but I felt HDN might not feel the same way, and so I went for Erdoganomics to make sure I wouldn’t put them in danger. This is what we call self-censure:)- a very minor one, but still:)

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