Can Eurozone woes gobble Turkey?

As Americans were enjoying roasted turkey at Thanksgiving dinner, I was busy trying to figure out whether Turkey could be roasted because of the Eurozone crisis. While policymakers have adopted a cautious tone, the public, including most local economists, is not too worried about Eurozone woes hitting Turkey, as evidenced by growth expectations.

There are several reasons for this optimism. For one thing, the latest economic indicators do not point to a dramatic slowdown this quarter. Capacity utilization came out rather strong in the Central Bank’s November Business Tendency Survey, which was released on Thursday, hinting that manufacturing is still resilient.

The real sector confidence index, also from the same survey, increased slightly after having fallen considerably in October.  New orders received for the past three months as well as export orders for the next three months were exceptionally strong.

Finally, whereas Eurozone Purhasing Managers Indices, or PMIs, were lower than the critical 50 benchmark, which points to a contraction in economic activity, for a third consecutive month, Turkish PMIs are going strong. Could it be possible the global crisis will “pass tangent” to Turkey this time around?

Not likely. While exports to the E.U. have lost some of their share in the last few years, they still make up slightly less than half of Turkey’s total exports. Therefore, the Eurozone slowdown is likely to hit not only exports but also manufacturing, which makes up one fourth of GDP and is highly correlated with exports

The Turkish economy is largely domestic-demand driven, so it could possibly thrive without exports if the services sector, particularly construction, which has been creating large employment gains, can hold on.

I doubt it, as the rising interest rates are likely to hinder consumer demand. Unfortunately, the challenging outlook for inflation and prospects for the lira would prevent the Central Bank from helping out with looser monetary policy, at least well into 2012.

Economic activity is likely to take a hit from consumer and real sector confidence as well if Eurozone troubles persist. The former is affected by Turkish asset prices, meaning that bouts of risk aversion will not only affect Turkish assets but also consumer spending.

However, I would be rather happy if the Turkish economy did not grow in 2012, provided that the $ 200-odd billion barrel did not explode: In addition to the $ 77 billion of current account deficit that needs to be financed, there is $ 135 billion of short-term external debt maturing within a year.

 Although some of this, such trade credits, can easily be rolled over, Turkish banks have $ 32 billion of debt, mostly owed to European lenders. As Eurozone banks deleverage to meet capital adequacy ratios or simply to make ends meet, their Turkish counterparts could find it more and more difficult to secure new borrowing.

 The government is well aware of the external financing risks, but there isn’t much they can do at this point. Except maybe to offer a Thanksgiving prayer to prevent Frau Merkel from running the Eurozone “Gegen die Wand” with her resistance to an ECB bailout.