The Kapali Carsi

A Goldilocks Plus Story for Turkey

For loyal readers who have patiently put up with my pessimism until today, I proudly present the latest  guest post from Ali G (not the rapper– sorry for the bad joke). As always, my pessimistic comments are right below the column:

I was planning to write about this later, but I felt I had to touch the Moody’s ratings upgrade somehow so here it is.

The time has come (it has actually started a month or two ago), for another Goldilocks Plus period and the Moody’s rating upgrade is just going to be the cherry on top. Let me explain. First of all, the scenario commonly referred as the Goldilocks means growth with just enough inflation. The Plus is an addition for Turkey and it stands for just enough current account deficit to go with the ideal growth and inflation mix. And before the structural issues are resolved, or let’s say there is real progress on the structural issues, Goldilocks periods for Turkey will be the early stages of a global takeoff and the mid stage of a slowdown.

This might sound a little weird, but let me make my case: During the first stages of a global takeoff, growth in Turkey increases rapidly relative to its peers, but global commodity prices(including oil) are still low, demand is just recovering and the increase in the CA deficit is manageable. However, once the global economy starts picking up momentum, then both the current account and inflation start becoming a problem quite quickly.

On the other hand, during the first stage of a slowdown, the economy is still too hot, meaning inflation is probably rather high and the CA deficit is almost certainly at the peak (as on the last quarter of 2011). However after a couple of months, the economy slows just to the right pace and stays there for a while at another Goldilocks Plus period, before the global slowdown really kicks in, which marks the end of the period as the economy loses growth altogether and contracts more than the world average. Let’s try to show this graphically.

The first figure shows global and local growth, along with the price of oil. Looking back at 2008, as global growth slowed, both growth in Turkey and oil prices collapsed, only to pick up after the first quarter of 2009. This was the first Goldilocks period and it went on until late 2010. At the end of 2011, there was a decoupling which we cannot see here, where there are signs of relatively strong growth from the US and China and a serious slowdown in Europe. This pushes oil prices up, while depressing local growth. Finally, oil prices peaked at the end of the last quarter (Q1 2012), when the growth picture for US and China also became much bleaker. At this point, the Turkish economy probably came close to a standstill, although there is still no contraction. This marks the start of the current Goldilocks period.

Let’s relate these to the CA deficit and inflation on the second figure through the price of oil and restate our case. In the aftermath of the 2008 crisis, both the CA deficit and inflation collapsed. Then, as growth started picking up, a Goldilocks Plus period started on the second half of 2009. This lasted up to the last quarter of 2010 when the economy had more or less heated up. Moving on, through the end of 2011, the deficit, which was at its peak, started narrowing gradually with growth continuing to slow and Lira losing value, but inflation kept increasing mainly due to the high oil price stemming from hopes of a US-led recovery and a weaker TRL. Finally, coming to the end of the last quarter, which marked the beginning of the second Goldilocks Plus period, the US and China also lost momentum and oil prices started falling, dragging inflation and the current account deficit in Turkey with it. The only missing part is local growth (as I mentioned above there is very little growth), but still it is not that bad, as nobody expects contraction just yet. However, growth could become an issue in the later part of the year depending on the pace of the global slowdown. This will mark the end of another Goldilocks period.

So there you have it, a Goldilocks Plus story for Turkey. I know it is a very crude analysis but you probably get the idea. I believe that the global economy will go through a couple of these mini cycles rather than decades-long super cycles, so this analysis should be of some use. And even if we move up to investment grade, that would probably create a one-off jump but, I don’t think it will fundamentally change what I’ve stated above.

Ali Gökhan is the acting economist at a Turkish conglomerate. The views expressed here are his personal views only and do not represent the views of his company.

Speaking of ratings upgrades and investment grade, there were “rumors”, especially after the Moody’s upgrade, that Fitch would bring Turkey to investment grade. Even FinMin Mehmet Simsek joined the bandwagon, stating on TV yesterday that a “Fitch upgrade for Turkey wouldn’t be surprising”. I am sure he was the quite surprised a couple of hours ago, when Fitch all but ruled out the upgrade in its Mid-Year Sovereign Review and Outlook. The agency noted that although soft landing is in sight, the high short-term debt and still large current account deficit leave the country vulnerable to external shocks (see page 17). I am looking forward to EconMin Zafer Caglayan’s reaction, as he had stated earlier that the Moody’s upgrade was not enough. He was also quite critical of the ratings agency in the past. I am also anxious to read tomorrow’s pro-g0venrment daily Sabah. But I am resolved: I know Sabah and Caglayan will “tempt” me to grace them into my upcoming Hurriyet Daily News column, but I will write about the EU Summit no matter what. I’ve even found my title: “Angela’s Ashes“!:), unless Frau Merkel & co. manage to surprise me big time…

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