Four Passover Seder questions

Although she wasn’t religious, my friend Esther, whose tragic fate you read about in my last column, was half Jewish.  I would like to #RememberEsther, while at the same time celebrate Passover and Easter, by carrying an old tradition to my column.

Jews remember their exodus from Egypt at Seder, which marks the beginning of Passover. During the dinner, which was possibly Jesus’ Last Supper, the youngest child at the table asks four questions about why this night is different from others. Being a kid at heart, I will ask and answer four questions on recent Turkish economic developments.

Why did credit rating agency Moody’s cut Turkey’s outlook? There were two reasons behind the revision from stable to negative outlook: External vulnerability stemming from political uncertainty and lower global liquidity as well as slowing near-term growth and growing uncertainty about medium-term growth due to lack of structural reforms amid uncertain policy environment.

Doesn’t last week’s data from February refute these claims? At first look, yes. Annual current account deficit decreased to $62.2 from 64 billion in January, and industrial production again came in higher than expected. However, the seemingly positive headline figures are hiding uglier details.

While the current account deficit will fall this year, the improvement may not be as marked as most analysts are expecting it to be, as I argued in my March 3 column: Turkey imports too much energy, its export-oriented sectors are not competitive, and its exporters import a lot of inputs they cannot obtain domestically. Besides, even optimistic economists do not expect the deficit to fall below 5 percent of the GDP, which would still be, as Citi analysts note, “too wide for comfort.”

I admit that industrial production has held up quite well until now, so growth may come in higher than expected in the first quarter. However, leading indicators are hinting at a significant slowdown in economic activity in the second quarter, which is likely to carry on to the remainder of the year. Besides, I am not sure if Turkey could grow more than 2-3 percent in the long-run without ample external financing in the absence of structural reforms.

Are the credit rating agencies unfair to Turkey? Government officials think so, claiming markets are a better gauge. However, a simple graph of sovereign bond spreads against credit ratings proves them wrong: Turkey does not pay higher interest rates compared to its rating, although some countries seem to be favorably treated.

Will the Central Bank of Turkey cut rates next week? Probably not, as Governor Erdem Başçı made it quite clear that they preferred to tamper with reserve requirements and liquidity first. But the Bank has already started cutting rates “by stealth.” As a result of loosening liquidity, interbank market rates fell nearly two percentage points last week.

I would really appreciate if you could take a moment to #RememberBerkin and #RememberEsther during your Seder tonight.