Economy in 2018, in pictures
• We have decided to revive an old tradition of ours in this final report of the year, that of looking at the economics of the full year, (mostly) in pictures -- hoping that you’ll find it useful.
• Needless to say, 2018 was a very tough year especially for Turkey, as an emerging market-unfriendly backdrop and ever-rising idiosyncratic risks drove the markets to fresh lows.
• On the real economy side, the slowdown that visibly started in Q2 because of the waning of the impact of stimulus measures from a year ago, morphed into a steep contraction in Q3 following the August market rout.
• The latter has now passed, but the worst is hardly over, as we’ve been pointing out on various occasions. A myriad of high frequency indicators suggests that the economy has likely contracted in Q4, which will likely spread through Q1 of next year.
• After jumping to around 25% in October, both consumer price and core inflation rates eased in November, thanks to, among others, a stronger lira and tax cuts, but there are reasons to suspect that “20% may be the new 9%”, as far as inflation outlook goes, should Turkey choose to muddle through on its own.
• In such a scenario, risks would probably be tilted to the upside even, given the sticky nature of inflation and heightened exchange rate pass-through.
• This was a year of monetary policy normalization, as the CBRT, at gun-point as usual, took action to increase money market rates by about 1100 bps during the year, and the one-week repo rate was again made the policy rate. The year confirmed that the Bank’s ‘reaction function’ remains binary: hike to avoid financial chaos on the eleventh hour, but stay on the sidelines otherwise
• Despite slower economic activity, various tax expenditures and a huge bonus payment to pensioners, the central government budget was saved thanks to one-off revenues and curbs on investment spending. But both of these are unsustainable, and the budget looks structurally weak...
• The 2%-ish of GDP deficit target should be met this year, but there is little doubt the deficit will widen substantially next year, absent a comprehensive program.
• The current account deficit has been narrowing very sharply in the past few months, which is good news from a financing perspective – and rejoice over it as “rebalancing” if you like -- but this is coming at the expense of a very sharp contraction in economic activity.
• Moreover, external financing has been the worst on record this year, with capital outflows, drains on CBRT reserves and lot of money coming in through unidentified sources.
• If there was one, “the word in a year” contest would have probably gone to “konkordato”, which means, roughly speaking, pre-bankruptcy court filings in Turkish. The problem has been growing throughout the year with more and more firms joining in, but evidence on the true scale of the problem is scant.
• A bold and credible plan is a must, if this vicious cycle were to be broken. The New Economy Program announced in September had the right focus, but that’s old news by now. We heard very little of it since, while economic management has been characterized instead, by extreme discretion with highly ad hoc and distortionary interventions.
• After several downgrades, Turkish sovereign slipped deeply into junk territory this year, dramatically regressing from the years 2012-13 when it had gained IG ratings from two of the top agencies...
Now read on...
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