The Kapali Carsi

Turkey: The Return of the Consumer

One of the most confusing and puzzling, or confuzzling, aspects of the Turkish economy of late has been the paths taken by the producer and the consumer, which were diverging until recently.

Here is the intro. to my latest Hurriyet Daily News (HDN) column. I argue, based on the latest leading indicators, that this dilemma is being resolved- with consumption picking up rather than production falling. You can read the whole thing at the HDN website.

I could not discuss all the relevant data at the column due to space constraints. One important piece of data that was also released this week was Monday’s November budget figures. There, the picture is mixed. On one hand, VATs on domestic consumption fell 6 percent yoy. But on the other hand, VATs on imports rose 22 percent yoy in dollar terms. Why this difference? Honestly, I have no idea, and neither did the two economists I briefly chatted with. This domestic VAT figure is the only recent data that went against my consumption pick-up call…

In the column, I also did not have enough space to discuss the economic, market and monetary policy implications of a rapid rise in domestic demand.

In terms of the economy, this means the rebalancing may have come to a stop. The VATs on imports I mentioned above are a leading indicator of actual imports, and they are hinting that yoy imports will probably increase in November. We’ll know for sure when the trade statistics are released at the end of the month. Therefore, Roubini Gloal Economics’ recent Turkey Outlook, “Goodbye Rebalancing”, is very aptly titled.

As for the market implications of my call, when I met with investors in early November, I argued, as a naive economist not too interested in P/E ratios and the like, that retail stocks could be a good bet early next year.

And finally, the Central Bank is likely to be cautious of the consumption pick-up and the accompanying credit growth. In fact, many economists interpreted the tone in the one-pager accompanying this week’s rate decision as hawkish. The Bank is likely to use reserve requirements as well as macroprudential measures (in conjunction with the banking regulator?) to rein in lending if credit growth gets out of control.

Speaking of this week’s rate decision, I am happy that the Bank has chosen a cautious stance by not lowering the floor of the interest rate corridor (surprising everyone) and hiking reserve requirements on FX liabilities. You may then ask why they cut the policy rate. For one thing, the effective funding rate was already below the policy rate, and so this wasn’t major easing in practice. They may have also silenced vocal Economy Minister Zafer Caglayan, who has been openly critical of the Central Bank for the past few couple of months- for not having cut sooner & more. So you may call this cut a “Caglayan cut”:)…

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