Tuesday, 15 February 2011


Growth At A High Price

Last month we commented on a Turkish Central Bank study that demonstrated clearly just how much Turkish industrial production depends upon imports and the worrying implications of this for the Current Account Deficit. Data released a few days ago only confirm this trend.

Industrial production in the 4th quarter increased by an enormous 12%, hinting at GDP growth of more than 8% for the full year 2010. The downside of these glossy numbers is that this growth came at the expense of a rapidly deteriorating Current Account Deficit. The CAD reached $7.5 billion for December alone and amounted to more than $48 billion for the full year, 243% worse than 2009’s CAD of $14 billion. The deficit as a percentage of GDP is getting up into the red zone at an estimated 6.5% for 2010.

While exports increased 10% to $121 billion, imports jumped 32% to $177 billion. The surge in industrial production was also felt in the energy bill that increased to $34 billion from $26 billion the previous year.

All this would not be a concern if the sources of financing this deficit were improving. But they are not. The deficit is being financed by short term portfolio inflows that can reverse course in the click of a computer key leaving the Turkish treasury with a giant hole to fill.

It is all well and good for Turkey to show Chinese-like growth numbers, but unlike the Chinese these numbers come at a very high price. While the Chinese show ever increasing traded surpluses, the Turks pay for their growth with ever increasing trade deficits. In many ways the country is in a growth trap – the faster it grows the deeper the deficit hole becomes.

With elections coming in less than six months there is no chance that the ruling AKP  will act to rein in growth. It has to show these glittering numbers and worry about paying for them later. And this means shoveling even more money into the economy to keep the engine running.

Investors so far have so far reacted warily to the growth of the Current Account Deficit, but have not shown signs of panic – yet. The Turkish Lira has depreciated 12% in the last two months, and the stock market is down 5% so far this year. Interestingly, the Greek stock market is up (it didn’t have much further to decline) 26% this year. The weakness in the Turkish market has thrown a wrench into plans for the National Bank of Greece to raise some much needed money by selling 20% of its Turkish subsidiary Finansbank. Turkish banking stocks are fading, and it is hard to do a deal when the market is going away from you.


The intra-Turkish rhetoric about Cyprus is heating up and ripping away the pretence of the Turkish Republic of Northern Cyprus as an independent country. Turkish Prime Minister Tayyip Erdogan’s angry words in reaction to a Turkish Cypriot demonstration against a Turkey-imposed austerity plan were quickly followed by similar words from the Deputy Prime Minister Cemil Cicek.  In addition the Turkish ambassador to Northern Cyprus was quickly replaced by a bureaucrat from the State Planning Office who designed the austerity program. He told the Turkish Cypriots that Turkey, who props up Northern Cyprus to the tune of $500 million every year, is their IMF and that they should essentially sit down and shut up. Apparently Erdogan thought the ambassador was not being firm enough with the Cypriots, and yanked him home to be replaced by the hard-line bureaucrat who acts more like a colonial governor than a diplomat.

Why is Turkey suddenly taking such a hard line on its yavru (baby) state? Is the Turkish prime minister angry at the failure of his attempt to turn Northern Cyprus into a stronghold of the Turkish ruling party (AKP) by importing thousands of Anatolian Turks and building mosques all over the island? Turkish Cypriots like their version of democracy and their secular way of life, and don’t really like heavy-handed AKP control. The carrot didn’t work, so is Erdogan now trying the stick?

Another  theory is that the Turkish prime minister is trying to prepare the Turkish part of the island for a change in status, one way or another, by the end of this year. Currently the break-away state is recognized only by Turkey. The economy of Turkish Cyprus was never strong to start with, and it is not helped by the trade embargo on the self-proclaimed state. In addition, many Turks are forced to find work in the southern, internationally recognized Republic of Cyprus because there is very little opportunity in the North.

These recent actions could be part of plan to get the Turkish Cypriots ready for the day when they can no longer count on the economic life-line from Turkey and will have to stand on their own in a newly integrated island if the talks succeed. Or, if the talks fail, Turkey will be in a stronger position to push for a change in the isolation of Northern Cyprus. It may never be internationally recognized but the trade embargo could be removed. Some in the European Union are already pushing for an end to the embargo despite the strong objections of the Republic Cyprus. Failure of new talks might just give them the courage to proceed. Northern Cyprus could also be opened to direct international flights from countries other than Turkey. Moves like this might allow the de-facto division of the island to continue in the grey area between international recognition and full integration with the Greek part of Cyprus. Not a real solution, not perfect by any means, but it may just be the best that can be obtained right now.

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