New PM adviser ‘clouds’ economic outlook
Figures released on July 8 showed that industrial production increased only 2 percent annually in May, much less than expectations of 4.5 percent. Similarly, at $7.5 billion, the current account deficit for the same month came in much higher than expectations of $6.7 billion on July 11, bringing the annual deficit to $53.6 from $51.4 billion.
But the real shocker was when Gov. Erdem Başçı stated, during the Central Bank’s regular meeting with economists on July 8, that the bank’s Reserve Option Mechanism was not designed to deal with portfolio outflows. This was a few hours after my column questioning its effectiveness appeared, and more importantly after Başçı “repeatedly argued in recent months that this mechanism would provide an automatic stabilizer in an environment of volatile capital flows,” as Deutsche Bank economist Robert Burgess noted.
Başçı also emphasized that they would think of hiking rates only to curb loan growth, not to fight exchange rate volatility. I believe the bank’s resistance to raise interest rates, and insistence on liquidity management and reserves depletion instead, could result in a larger hike eventually, as was the case in June 2006 and October 2011. It could even cause a “first generation” currency crisis, as outlined by Paul Krugman in 1979. But with economic growth not gaining steam and all this talk of an interest rate lobby, I can empathize with Başçı.
However, I am really worried that the country’s banking regulator launched an inquiry after July 8’s $2.25 billion of foreign currency sales failed to appreciate the lira on a day there wasn’t really much pressure on emerging market currencies. Along with the earlier investigation by the equities watchdog, it could end up causing investors to be more cautious on Turkey.
I am at least consoling myself with the fact that Prime Minister Recep Tayyip Erdoğan has now one of the best forecasters in the world at his side. Journalist, economist (I am using both words quite liberally) and above all conspiracy theorist Yiğit Bulut, who recently argued that foreign powers were trying to assassinate Erdoğan by telekinesis, was appointed as chief adviser to the PM on July 9.
Bulut noted in his column in Turkish daily Vatan back in 2008 that Turkey was turning into a police state and looking more and more like Adolf Hitler’s Germany. The country was shifting from democracy to fascism, with the press under a lot of pressure, he warned. Here is a guy who could accurately see five years ahead, whereas most other analysts, your friendly neighborhood economist included, have no idea what’s going to happen five days from now.
Joking aside, since Bulut, which means cloud in Turkish, firmly believes in the existence of the interest rate lobby, even without a visit to Amsterdam, the Central Bank will have a really tough time raising rates even if it wants to.