FACTS AND FIBS ABOUT THE TURKISH ECONOMY

Indicators and fundamentals clash in the Turkish economy. While the former gives signs of a patient taking his last gasps, the latter points to the image of a promising athlete for the Olympics ahead.

In the past few weeks the Turkish economy has begun to give signs of a critically ill patient’s exhaustion. Respiration has slowed down greatly from 4600 to below 3000, these figures showing the IMKB index. In return, the heartbeat has gone up alarmingly - from 70 to 120-130. The “heartbeat” figures in this case indicate percentages for the compound interest rates of borrowings in the domestic market. The patient’s expenditures to prevent his temperature from rising too high have depleted his funds in the bank from 100 to 85. In other words, the Central Bank’s foreign exchange reserves fell from about $26.6 billion to $22.6 billion when it kept on selling dollars to meet the quitting foreign investors’ demand lest the value of the dollar prematurely went up above TL280,000.

The cronies of the patient, the rich foreigners of the noisy, happy-go-lucky days have fled in a panic, cashing in all of the $2.5-3 billion they had brought in with the promise of doing good, long-term joint investments after the initial celebrations.

And of course, the competitors and enemies of the patient or ever-ready gossipmongers and speculators have immediately poured fuel on the fire with exaggerated reports and statements. All these make things worse for the patient who is nowhere near bankruptcy as claimed, but who has another chronic illness, inflation, for whose cure he has been fighting recently.

The black side of the coin - indicators

To start from the black side of the coin, the indicators of the economy, the IMKB (the Istanbul Stock Exchange) index went down by 20.77 % in a week up to August 28^th. Only on one day, August 27^th, it lost a record high of 13.12%. This nose dive in IMKB was in keeping with the European and world bourses’ loss of value due to the Russian crisis, but, excluding perhaps Latin America, it was the highest drop in value after the Russian market’s 23.20% in the same week. On August 31^st the index was below 2700 which corresponded to just under $1, while it was $1.99 at the highest point on October 23^rd, 1997. It meant a more than 50% drop.

In return, compound interest rates of bonds for domestic borrowing soared by 23% - from 102% at the beginning of the week to 125% at the end, on August 28^th. The compound interest rates went up as high as 133% during the week, but Prime Minister Yılmaz’s press conference on Friday, August 28^th helped to stabilize the market a little. The slump in the stock exchange, the new rules for taxes and interest rates, the political uncertainty due to elections in eight month’s time and, of course, the Russian crisis were instrumental in this sharp rise in interest rates.

PM Yılmaz announced at his press conference that they were reducing the cost of borrowing as from September 1^st. To this end, they would eliminate as from that day the 6% levy on deposit transactions among banks; reduce the transaction tax on banks and insurance companies of public sector bonds from 5% to 1% and abolish the limits in foreign exchange forward purchases and sales of banks. The Prime Minister promised further measures to relax the markets according to the conditions.

These measures made a good impact on both the IMKB and interest rates, but they were both short-lived and inadequate.

The future of interest rates will be known on September 2^nd when over $2 billion worth of bonds will mature. As more than half of these bonds belong to foreigners it is important what will happen after they are repaid. If the foreign investors go on with the trend so far and try to quit the country their ill effects on the Turkish economy in recent weeks will grow bigger. That is why PM Yılmaz said at his press conference that those who left Turkey would lose in future and those who stayed on would gain. He pointed out that the Central Bank’s foreign exchange reserves were $22.6 billion compared to $2 billion in Russia and they had a further $10 billion in the Turkish banking system. Turkey is the last country that needs to make devaluation, he stressed. “What is important is to save our financial markets from short-term external funds that enter our system with speculative purposes. Equally important is to replace them with long-term institutionalized investors. This holds good for both the stock exchange and other financial markets,” said the Prime Minister, thus confirming Pulse’s forecasts in the last few weeks. (Issue No:43)

Answering a question on why the Russian crisis had made such a big impact on Turkish markets the Prime Minister blamed foreign speculators. He said, “The reason for such an exaggerated impact of external factors on the stock exchange is that our bourse does not have sufficient depth and foreign investors are relatively too influential in short-term transactions. They treated the Turkish economy the same as the Russian economy and began to liquidate their papers (shares and bonds) in Turkey. Neither our indigenous investors nor our people have developed such a trend at the moment. It is a pleasing factor. I believe that the new rules will render the speculators ineffective.”

State Minister Güneş Taner said that certain quarters wanted to mislead Turkey away from its economic parcel by taking advantage of the Russian crisis. The Government would not be taken in by these efforts. “No one should expect us to deviate from our course defined by the economic program. The current storm will pass over,” he stressed.

The bright side of the coin

While the alarming indicators were giving pessimist quarters or the Opposition golden opportunities to criticize the economic performance, the fundamentals of the economy were providing the optimists equally valuable and probably more reliable opportunities to be confident.

Above all, economy bureaucrats who started at their own accord the economic stability parcel back on July 30^th, 1997 by signing a protocol between the Treasury and the Central Bank are religiously sticking to the program. It was later enlarged by the Government and presented to the IMF as a pledge for constant monitoring of the economy. The economic fundamentals foreseen therein are holding good despite the above indicators and continue to reflect a much healthier economic structure.

The Government is taking timely measures to counter or render ineffective the above indicators. For instance, to what extent do the stock exchange fluctuations reflect the economic performance especially when the trends are externally guided and have not influenced the local people, as is the case in the IMKB? As long as the exodus from the IMKB is restricted to foreign speculators, the downtrend will stop and the market will stabilize at a lower level, but it will not deliver deadly blows to the economy. That is exactly what is happening in the IMKB and the financial markets in Istanbul at the moment.

Likewise, to what extent do rising interest rates effect the economy badly when you take measures and curb the supply of bonds to the minimum both in the amount of money borrowed and in its term? Following the rise of interest rates to 130%, the Government shortened the term of bonds to less than six months last week and also cut down the amount of sales, thus reducing to the minimum the loss of the Treasury due to high interest rates. It is now waiting for the storm to calm for bigger bond sales when the interest rates drop. That is why sweeping pessimistic calculations based on 130% interest rates are wrong.

Last week several fundamentals began to appear for the first half of the year and they were really impressive.

For instance, the 7-month budget returns show that public expenditure totalled TL8,350 trillion in this period and the total revenue was TL6,152 trillion, the deficit being TL2,198 trillion. A tax revenue of TL4,855 trillion was really a big achievement indicating a 121.5% increase on a year before. The media underestimated this success and preferred to emphasize that the budget expenditure and deficit had grown at even bigger rates, 137.7% and 226%, respectively. There were several pessimistic comments and articles about the failure of the economic program, despite all efforts and sacrifices.

Yet everything was unrolling beautifully in keeping with the economic program. The 137.7% rise in public expenditure in the 1998 budget was already known at the beginning because interest payments and State personnel payments covered 80% of the budget and there was nothing any government could do about it.

Likewise, the TL2,198 trillion deficit was totally in step with the economic program. Divide 2198 by seven and multiply by 12, you get TL3,768 trillion deficit for the year. It is better than the TL3.9 quadrillion gap foreseen in the 1998 budget.

Another good signal came from yet another important economic fundamental, the balance of payments. According to the official figures released by the Central Bank for the first half of the year, the current transactions gap narrowed by 34.7%, from $2.317 billion in the first half of 1997 to $1.513 billion this year. This improvement was despite the fact that the foreign trade gap widened by $7.520 million in these periods. Hard currency incomes from capital movements more than covered this gap and resulted in a considerably improved balance of payments this year.

Like the Central Bank that released pleasing facts about the economic fundamentals, the DIE (State Statistics Institute) also came out with another set of figures concerning the fundamentals. On August 31^st DIE released the economic growth figures for the second quarter. According to these figures, the GNP grew by 9% in the first quarter and 4% in the second. The GNP growth for the first half was 6.3%. The GDP figures, which do not include income from external sources such as overseas contracting services, were less favourable. The GDP growth was 8.3% in the first quarter, 2.6% in the second and 5.2% in the first half. The per capita GNP rose from $3048 in 1997 to $3080 in the first half of 1998.

Again, this decline in the growth rate in the second quarter was totally in accord with the economic program which foresees 4.5% growth for the year after an average of 7-8% in three years on the run between 1995 and 1997.

Finally, the inflation figures for August will be announced by DIE within two days. These figures will be another important indicator to show the performance of the fundamentals and the economic stability program. There is reason to believe that they will not be a shock for Turkey’s economy rulers.

In short, the world champion of the future, the Turkish economy, was, in the last few weeks, confined to bed with a high temperature and other irregular indicators of respiration problems and high pulse beat due to a virus, but competent doctors were at work to keep everything under control.

This was the difference between the Turkish and Russian economies, according to a report by the German Central Bank last week. uras@ada.net.tr, September 1^st, 1998