Turkey’s economic deterioration reflected in expectation surveys

Slowing growth rates and the rapid increase in foreign exchange rates have demoralized Turkey’s business world. The current state of affairs in the economy not only troubles the banking sector, but also the entire business world, primarily the indebted real sector.

The U.S. dollar exchange rate that has gone up to 3.40 Turkish Liras is not likely to drop much. That is why we have seen buyers buying the U.S. dollar at 3.37 liras or even higher. In other words, the foreign exchange rate is not expected to curb; in fact, it is expected to rise. 

The passiveness of the government and the Central Bank carry a huge share of the blame for the continuous rise in upward expectations of exchange rates and the deterioration of economic expectations. Markets see that the Central Bank’s foreign currency reserves are inadequate, which is why nobody expects the Bank to sell foreign currency in order to curb exchange rates.  

Everyone sees that interest rates are the only weapon to curb exchange rates. But because President Recep Tayyip Erdoğan and his advisers are staunchly against increasing interest rates, exchange rates are expected to continue rising.  

If the Monetary Policy Board (PPK) and the Central Bank fail to decide on an interest rate increase of at least half-a-point on Nov. 23, then the upward move in exchange rates will undoubtedly continue. The common acceptance that the Central Bank cannot act independently is one of the most important factors fueling the loss in market confidence.  

In short - while the U.S. Federal Reserve’s increase in rates in December has recently been confirmed, and while the expectation of more rate hikes in 2017 has been shaped - domestic political debates in Turkey, the clashes around the country, and tense relations with the EU, all exacerbate the upward trend of exchange rates. When the required decisions regarding the economy are not taken independent of political and ideological reasons, it becomes inevitable that expectations will further deteriorate. 

Surveys also decline  

The deterioration in expectations is now easily visible in data and surveys. The expectation survey of the Central Bank released at the beginning of the week clearly demonstrated an expectation for a hike in interest rates and a drop in growth. 

According to the November expectations survey, the drop is expected to continue until the end of the year. The value of the U.S. dollar for the end of the year is expected to have increased from 3.12 liras to 3.33 liras, and while the inflation expectation for the short-term remained the same as in the October survey, there were signs of long-term deterioration. 

National income estimations, which have been falling since July, are dropping further. Growth expectations, which were 3.7 percent in July, have dropped all the way to reach 2.9 percent in the November survey.
 
It is fair to guess that only a portion of the demoralization in the economy has been reflected in expectation surveys. In short, end-of-year expectations are likely to deteriorate further over the next month.