ALARMING SIGNS IN THE ECONOMY: ARE THEY REAL OR FICTIVE?
The fight against inflation is not a failure, but it is no stunning success either. Stock exchanges going through a shock wave. Interest rates are rising, but economic fundamentals are not yet in jeopardy. Bureaucrats stick out their necks to prevent populism before elections. An excellent harvest turns out to be a stumbling block for the success of the monetary program. In the past two weeks the economy gave alarming signs, while there were no significant changes in the fundamentals. At this very promising point and successful performance of the economic stability program the Government was in the position of facing lots of problems and criticisms about the economy. The following are the highlights of these developments which delivered serious blows to the economic performance.- The inflation rate in July was above the calculated and hoped for rates, though wholesale prices approached the year-end target of 50%. Consumer prices in July rose by 3.4% and became 85.3% in a year up to the end of July and wholesale prices became 2.5% and 72.1%, respectively. As the IMF takes wholesale prices as the basis, the objective of 50% at the end of the year was not lost by these rates. Wholesale prices were 92.5% in January and fell to 89.6%, 86.0%, 83.3%, 79.9%, 76.7% and 72.1%, respectively, in the following months up to the end of July. The same trend continued in consumer prices too, going down to 85.3% in July from 101.6% in January. In between, the yearly inflation rates of consumer prices were 99.3%, 97.2%, 93.6%, 91.4% and 90.6%, respectively. The bottom line was that the steady drop in both consumer prices and wholesale prices continued, but the warning for a constant watch over the inflation until the end of the year was prevalent for the economy rulers. Two points were noteworthy on this question. (1) The Government claimed that the Fresh Fruit and Vegetables’ Market Bill would pull down prices by 20%. It is two months since the bill was legislated and no such effect was seen in the economy. The press criticised Deputy Prime Minister Bülent Ecevit last week saying that he was supposed to reduce fruit and vegetable prices by eliminating the middlemen. Under the new law while the producers had come to the point of not picking tomatoes because of fallen prices, consumers were not eating them cheaply in the cities. Ecevit came up with an explanation at a press conference last week. He said that legislating the bill was not enough. They had to pass the relevent decrees and regulations within the new law. They were about to complete these preparations. Once the producers’ unions for various fruits and vegetables were set up within these decrees the system would work for their supply to the consumer directly from the producer and prices would fall. Inşallah. (2) The automatic pricing of fuel started on July 1st and the deregulation of fuel prices was supposed to lower the cost of fuel for the public, but no such thing happened in the first 5-6 weeks. This failure was despite the fact that in Italy, to which Turkish prices were geared, fuel prices went down because oil prices throughout the world fell to a record low of below $12 per barrel. On the other hand, fuel prices in Turkey have gone up by more than 8% since the deregulation. It is understood that rather than lowering the price of fuel the Government chose to increase the fuel consumption tax rates so that it could receive additional revenue for the Treasury. In short, the fight against the inflation was not a great achievement, but the trend of cautiously pulling down the prices went on.
- The Istanbul Stock Exchange (IMKB) was the scene of a shocking slump in the last two weeks. While this trend was universal, the declining value of shares was quite minimal in Europe and the United States, but very high in Istanbul and even higher in Moscow. The IMKB index had a record high of 4531 on July 16th. It closed last week, on August 14th, at 3351 points. It was noisily heralded in the press last week that only on August 10th and 11th the market value of shares fell by $1.5 billion from $11.3 billion to $9.8 billion. On the basis of the dollar the IMKB fell by 27% in three weeks. Expectations of a devaluation in Russia and China and the economic crisis in Japan, not to mention “zippergate”, were instrumental in this crash. Foreign capital in the IMKB simply sold shares or preferred to keep away from the market and the result was a big drop in the volume of transactions and the value of shares. For example, Templeton Emerging Markets Fund revealed that its investments on the IMKB went down from $473 million on June 30th, to $401 million on August 7th. According to IMF figures, foreign capital investments in Turkey are very low - $2,412 million direct and $394 million shares portfolio in 1996, compared to $18,211 m and $4,465 m in Spain, $4,910 m and $13,787 m in Korea, and $7,433 and $6,728 m in Thailand. The exodus was bigger from the Moscow Stock Exchange which was much more volatile than the Turkish market. Juliet Sampson of the Bank of America told Yeni Yüzyıl (August 14th) that the drop in the Turkish market was due to external reasons rather than internal and that the future was closely dependent on the Moscow market. “Because Turkey has strong ties with Russia the Turkish market also fell when the Russian one fell,” she said. Whatever caused this big drop in the value of the Turkish market, it is a fact that such “disasters” of $1.5 billion loss in two days in the stock exchange are “virtual realities” which is translated into Turkish as “sanal gerçek” (fictive reality). And, indeed, there are a lot of “fictive” earnings or losses in the stock exchange business, rather than there being any significant indicators of the fundamentals of a national economy. Still the ill effects of such exciting news on an economy are not negligible, especially for the Turkish economy which is fighting a war of life or death against inflation.
Interest rates increase by 30 points, risking to upset the economic program
- A more serious, alarming development in the Turkish economy in the last few weeks was the rise of interest rates for various reasons, ranging from external ones like Russia and China to domestic ones such as early elections and the taxing of bank transactions. The Government had already achieved to reduce the compound interest rates to 70% in domestic borrowings. Last week that rate went up to three digits again, to 102%. (issue No:27) In addition to the impact of the Russian economy on Turkey and the departure of foreign capital from emerging economies the world over, a wrong step taken in the new Tax Law caused this adverse development. With an unexpected decision the Government began to levy 12% tax on domestic borrowing instruments, ie bonds, following the legislation of the Tax Bill at the end of July. After a few days of hesitation and contradictory statements from the rulers of the economy it was understood that this step would not be withdrawn and it immediately caused interest rates to go up. At the close of last week, the Government reduced the levy from 12% to 6%, but its impact on the economy and interest rates was not known at the time of writing this article. However, one thing is certain, the Government will not allow these adverse developments to continue, as long as it can be helped. State Minister for the Economy Işın Çelebi said that they had never expected such a boomerang effect from the 12% levy and they would now watch what difference it would make by slashing it to half. They would take the final decision about it within a month according to its impact on the market, he said. Over the weekend top-level economy bureaucrats met in Antalya and decided to recommend the Government to abolish this levy. The Director-General of Public Revenues, Nevzat Saygılıoğlu, supported this decision and promised to bring it up with the Finance Minister, Zekeriya Temizel, for the final decision.
- Within its policy of absolute economic transparency, the Government has announced that Turkey’s external debts were $92.2 billion and domestic debts $30.63 billion at the end of 1997. As of the end of June 1998, domestic debts totalled TL8,389 trillion corresponding to $31.3 billion. External debts are medium- or long-term - 75%, and the average maturity period for domestic debts is 10.5 months. The structure of domestic and external debts is enough to explain the importance of the rise in interest rates for the economy. ( issue No:30-31). The following are the details of these calculations.
- With round figures, $30 billion or TL8 quadrillion domestic debt means TL800 trillion additional payment by the Treasury if interest rates go up by 10 points. The recent increase being 30 points, the additional payment burden to the Treasury is TL2,400 trillion. Even if the new Tax Law brings in TL500 trillion additional revenue this year, as is estimated, it means nearly TL2 quadrillion additional burden. As nearly eight months of this year have passed it may mean nearly TL1 quadrillion burden. Of course, the whole calculation is hypothetical and based on the assumption that an interest rate of 100% will continue. The necessary measures are already being taken and it is expected that interest rates will shortly be pulled down towards 70%. In fact, the State Minister in charge of the economy, Güneş Taner, said that when the interest rates unexpectedly surpassed 100%, he stopped the sale of bonds. “They (speculators) tried to push through 110% interest rates. They attempted to stage a show of power, but they were frustrated,” he said. Both Taner and Çelebi are giving assurances that everything is under control in the economy, that they will be religiously loyal to the monetary, credit and exchange rates programs handed to the IMF and materialize a 50% inflation rate by the end of the year. The high-level bureaucrats in charge of the economy such as the Central Bank Governer, the Under-Secretary of the Treasury and the Planning Chief are also determined not to allow populist policies in the economy and they are sticking together firmly to defend the announced programs against the politicians now that election time is round the corner.
No populist policies in agricultural prices
- Last week Prime Minister Mesut Yılmaz chaired the High Planning Council (HPC) to review the economic conditions in the light of the above disquieting indicators. They were pleased to learn that the fundamentals were sound. There was a surprising rise (TL200 trillion) in tax revenue in July. The estimate of TL9.35 quadrillion tax revenue for the year would be surpassed, as the total of the first seven months was TL4,930.6 trillion (TL500 trillion above the estimate) compared to TL2,192 trillion a year before.
- The HPC meeting was important in that it would prove how sincere the Government is in implementing the monetary and other programs handed to the IMF. Hazelnut prices were established at $2.26. It was only one cent more than a year before. In terms of the TL it meant a 66.5% increase from TL366,412 in 1997 to TL610,290 this year. It proved that the Government would refrain from populist policies in announcing agricultural prices this year. Still finding TL150 trillion for hazelnut purchases by Fiskobirlik (The Hazelnut Union) was quite a problem for the economy rulers. Hazelnut yield was 500,000 tons last year and estimated to be 600-700 thousand tons this year. Hazelnut exports in the September 1997 and September 1998 period is approaching $1 billion. At $453 per ton 206,000 tons of hazelnuts have been exported for $933 million. A year before it was $733 million at $394 for 186,000 tons of exports. If the Government finds $500 million (TL135 trillion) for these purchases, with the TL15 trillion available in the Price Stability Fund, this financing question will be solved. Otherwise, hazelnut prices and the income from exports will drop greatly.
- Agriculture Minister Mustafa Taşar announced bumper harvest expectations this year, thanks to sufficient rainfall. Wheat yield was 18.65 million tons last year and expected to be 21 million tons this year. Barley may go up from 8.2 million tons to 8.8 million; rye from 235,000 tons to 250,000; oats from 280,000 tons to 310,000; maize from 2.08 million tons to 2.2 million; rice from 275,000 tons to 300,000; cotton from 2 million tons to 2.2 million, sugar beets from 13.5 million tons to 15 million and sunflower from 650,000 tons to 700,000. This good news, however, caused sleepless nights for the economy bureaucrats who could not possibly make ends meet between the money needed for these purchases and the funds available in the announced monetary program. The press claimed that TL670 trillion was needed for these purchases and the Government could hardly raise TL60-70 trillion. The rest could be financed by the Agricultural Bank. Treasury Chief Yener Dinçmen described these figures as “exaggerated.” The money needed for the agricultural support purchases is not TL600-700 trillion as claimed, but only TL280 trillion, he affirmed. “We will remain loyal to the program. We will have no additional budget. We will ask for sacrifices from no one,” he stressed. uras@ada.net.tr , August 16th, 1998