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February 19, 2012, Sunday

Exports will be the key for a soft landing

Nowadays, the use of the “soft landing-hard landing” terms, borrowed from growth terminology, is very popular among Turkish economy forecasters. A large majority of local economists, including the ones at the Central Bank of Turkey and the Treasury, are in the “soft landing” camp, while foreign forecasters, including the International Monetary Fund (IMF), constitute the majority of those who expect a “hard landing.” Before going further into this hotly debated issue, let me briefly explain the meaning of these concepts in the context of the Turkish economy.

After two years of record-beating growth rates that stem from strong domestic demand, which at the same time caused a historically high current account deficit (CAD) as well as a hike in inflation, slowing down the domestic-led growth has become not only necessary but also desirable in order to correct the macroeconomic unbalances. To do so, the Medium Term Program (OVP), the official roadmap for the economy, planned for a growth rate of 4 percent this year, down from more than 8 percent last year. This slowdown is expected to be accompanied by a modest decrease in the CAD/GDP ratio (from 10 percent to 8 percent) and a decline in the inflation rate from 10 percent to 6.5 percent. This is the soft landing scenario. In the opposite camp, the hard landing scenario also forecasts a drop in the CAD/GDP ratio as well as a decline in the inflation rate, but a more modest rate for growth. Estimations of the hard landing camp for economic growth vary between 0 to 2 percent, the IMF being one of the most pessimistic, forecasting only a 0.4 percent growth for 2012.

Two main factors explain the big difference between these two scenarios. The “soft landers” believe that in 2012 households will lose their appetite for new cars, houses and so on thanks to a tight monetary policy in place since a few months, which pushed consumer loan interest rates up to 16 percent. However, they do not think that this loss of appetite will become a diet. The “hard landers,” on the other hand, do not agree with this assertion and think that private consumption will grind to a halt due to a necessary deleverage because Turkish household debt has been increasing too rapidly after the crisis. At this point, let me just remind you that the “hard landers” seem to forget the fact that the indebtedness of Turkish households is low compared to, say, Eastern Europeans. I agree with the point of view of the “soft landers,” but let's leave the debate on consumption aside for a future article.

The second factor explaining the difference of forecasts between the two camps is the positive contribution of the net exports to economic growth. Indeed, one of the cornerstones of the soft landing scenario is the higher increase in exports compared to imports. This will be the key in sustaining growth at some 4 percent and to decrease the CAD. However, the “hard landers” are quiet pessimistic about the Turkish exports due to the dark economic outlook in Europe. For the decrease of CAD they bank on the decrease of imports caused by weaker domestic demand.

I think that the “hard landers” are not fully aware of the fact that since the third quarter of 2011, the contribution of net exports to growth has turned out to be positive and will probably continue to be so in the fourth quarter, too. The critical question is: Can this positive contribution of net exports to economic growth be sustained in 2012? In other words, can exports increase more than imports this year? If the Israelis are wise enough not to strike Iran, the answer will depend on the performance of Turkish exports in its two main markets, Europe and the Middle East and North Africa (MENA) zone.

There is a broad consensus among econometric researchers concerning the determinants of exports: The exchange rate depreciation matters little while external demand matters a lot. So, hoping that the Turkish lira will not appreciate too much, we have to focus on the two main markets for Turkish exports. I can say that the perspectives do not seem to be that bad. Let's start with the largest market. It is true that European growth will be close to zero this year. But when European growth decreased from 2 percent to 1.6 percent in 2011, Turkish exports to Europe increased by 19 percent (in US dollars), keeping Europe's share in Turkish exports steady at 46 percent. The astonishing feature of this increase was that Greece, while its economy contracted by almost 7 percent, imported 7 percent more Turkish goods. Italy, despite its growth rate being close to zero, imported 21 percent more last year compared to 2010. Needless to say, Turkey increased its exports to other European Union countries, too, except for Portugal and Slovakia. Since the prospects for the European market will be less bright this year, the increase in Turkish exports will most probably be quite modest, but still positive.

The so-called “Arab Spring” did not hurt Turkey's exports either, although an adverse impact was widely expected. With no surprise, the only two countries to which exports decreased were Libya and Syria. However, exports increased to Egypt and Tunisia as well as to other Middle Eastern countries. A real boom occurred in exports to Iraq, which imported 38 percent more Turkish goods in 2011 whereas Iran's imports from Turkey increased by 18 percent despite or because of the occidental embargo. MENA's share in Turkish exports, which used to be only 14 percent a decade ago, has reached 25 percent today and still looks to increase in the future as long as the transition to democracy can be realized without too much instability in this region.

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