15 Temmuz 2014 Salı

No economic revival in sight

Economic growth and performance has become a critical issue in Turkish politics. The Justice and Development Party (AKP) candidate for the presidency, Recep Tayyip Erdoğan, believes firmly in his victory on Aug. 10. 

Nonetheless, he is worried about the outcome of the next general elections, which are to be held at the latest by June 2015. Mr. Erdoğan knows that the so-called “de facto presidential regime” he defends will be very problematic, not only with respect to the constitutional and legal setting that gives executive responsibility to the prime minister but also politically, since the prime minister who will emerge out of the general elections risks not sharing his priorities with the president of the republic. At the end of the day, the new prime minister will also be seen as an election winning leader.

So, Recep Tayyip Erdoğan, even if he becomes president of the republic, is seeking a referendum majority (more than 330 seats) in the next general elections in order to make a new constitution, into which a presidential regime “a la Turca” will be incorporated. In the last general elections in June 2011 the AKP fell four seats short of the referendum majority, despite getting 49.8 percent of the vote. Having at least six or seven seats more requires a 51 percent share of the vote, at least. In the March 30 local elections AKP support by the electorate, although quite controversial, was well below this critical threshold -- around 45 percent at best.

The only way for the AKP to increase its support amongst the electorate is a booming economy. However, the Turkish economy is not going as well as Mr. Erdoğan wants. He is very keen on the economic growth performance. The government's Medium-Term Program forecasts a 4 percent growth for the gross domestic product (GDP), but Mr. Erdoğan definitely wants more. In the year's first quarter, growth reached 4.3 percent. This achievement, I believe, saved an open clash between the prime minister and Deputy Prime Minister Ali Babacan for the time being. However, the recent forecasts for the second quarter and the remainder of the year are not very bright.

Bahçeşehir University's Center for Economic and Social Research (BETAM) revised its yearly growth forecast for the second quarter from 3.8 percent to 3.4 percent in its last economic forecast, published on Friday. Indeed, the leading indicators, such investments, exports, industrial capacity utilization and consumer confidence, indicate a deceleration in the growth rate from the first quarter to the second. The Industrial Production Index stagnated compared to the first quarter and exports decreased, mainly due to a slowdown in the European economy. In fact, the so-called “balanced growth” is well under way since the current account deficit continues to narrow. BETAM forecasts an improvement of 0.6 percentage points in the current account deficit-to-GDP ratio, down to 5.8 percent from 6.4 percent. Regarding yearly performance, the Organization for Economic Cooperation and Development (OECD), the International Monetary fund (IMF) and the World Bank all recently revised their unrealistically low growth forecasts upward, but even so they remained around 3.5 percent.

A positive and balanced but rather low economic growth is certainly good news for Babacan, but not for Erdoğan. He does not care about “balanced growth.” The level of growth is more crucial than its sustainability in the medium term. He knows that with a growth rate of under 4 percent he can claim neither decreasing unemployment nor an improvement in the welfare of the populous segments of society. He also knows that low growth means low tax revenue, and low tax revenue means limited public resources for spending on infrastructure.

Moreover, Mr. Erdoğan firmly believes that it is possible to revive the economy by making sizable cuts in interest rates without jeopardizing either the stability of the exchange rate or making efforts to decrease inflation, still running around 9 percent.

In this context the Thursday meeting of the Monetary Policy Committee (MPC) has become very critical. Since April, the Turkish Central Bank decreased its policy interest rate by 175 basis points to 8.75 percent from 10 percent in two steps. In line with this decrease, bank loans' interest rates decreased also, by 200 basis points roughly. But this ease in financial conditions did not have a noticeable effect on domestic demand, at least not yet. So, Mr. Erdoğan does not ease up on his pressure on the central bank managers. However, I do not think any further room actually remains for an interest rate decrease. If the option of a limited one is decided by the PPK next Thursday, this decision will be perceived as a sign of weakness in business circles. If the MPC decides to keep its policy rate unchanged, it must be ready to face the fury of Mr. Erdoğan once again. 
(This article is published in Todays' Zaman, July 15, 2014)

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