The year of rebalancing

How to summarize in a few words the economic developments of 2012? I first thought “The year of low growth.” But I found it too obvious. I do not know how many times I have discussed this fact in this column. The readers know it very well. Certainly, the spectacular decrease of the growth rate is an important event having crucial implications, and I will be back to it below. My second candidate for the title was “An exceptional year.” Indeed, it was the case, and I will explain why. But finally I opted for “The year of rebalancing.” This was more informative and less ambitious.

The most striking feature of 2012 I believe was the correction of macroeconomic imbalances, the so-called “rebalancing process,” which started, indeed, in the third quarter of 2011 and continued along in 2012. After a very robust recovery started in the second quarter of 2009, the Turkish economy grew at a record rate of 9.3 percent in 2010 and pursued its strong momentum in the first half of 2011. This very high growth by world standards was fueled by an astonishing loan expansion based widely on external financial sources. This loan activity, which reached a 40 percent year-on-year increase, provoked in turn very high domestic demand, producing a huge current account deficit (CAD), while the Turkish lira was appreciating dangerously under the pressure of excess capital flows. As I wrote Monday in this column, “The Turkish economy truck was going at full speed towards the wall, and something had to be done.”

Then the Central Bank of Turkey tried to establish a rebalancing process to correct the imbalances cited above. This was not an easy task since there were multiple goals to achieve, like cooling loan expansion, depreciating the lira without loosing control of inflation expectations and switching growth from a domestic demand led growth to an export led growth to narrow the huge CAD. The central bank was obliged to develop a new monetary framework with new tools. I do not want to return to this subject as I largely commented on it last Monday in this column.

Central bank intervention worked quite well. Domestic demand has now come under control -- maybe too much so -- and growth has been based on net exports (exports started to increase more than imports) since the third quarter of 2011 as I mentioned above. As predicted, CAD began its decline along with the growth regime switch. The CAD ratio to gross domestic product (GDP) is estimated by a large consensus to be down to less than 7 percent in the last quarter of 2012. One year earlier, it exceeded 10 percent. The exception lies here as was pointed out by Hakan Kara, the chief economist of the central bank, during his conference at Bahçeşehir University on Wednesday. Indeed, this is the first time that a rebalancing has occurred in the economy through a planned intervention by economic authorities.

All the previous correction -- or if you like, adjustment processes -- have now been realized by market forces during the economic crisis. In 1994, 1999, 2001 and 2009, the over valued lira and the increasing CAD had been corrected through sharp devaluations, uncontrolled inflation hikes and GDP contractions, reaching 4 to 5 percent. In 2012 we almost controlled depreciation and positive growth -- albeit lower than planned. The Medium Term Program was forecasting a growth rate of 4 percent. The estimated growth rate for 2012 is below 3 percent. This is an insufficient growth rate regarding unemployment. It is not surprising in these circumstances that unemployment has started to increase. Certainly, the government cannot accept this unexpected and undesired development without a reaction.

For the moment, the Justice and Development Party (AK Party) government as well as the central bank trust their optimistic 2013 scenario. Indeed, they expect a revival in domestic demand, while the positive contribution of net exports to growth continues. In other words, CAD will continue to shrink, albeit at a slower rhythm, plus domestic demand could give an extra push to growth. This could be too good to be true. I will discuss this optimistic scenario on Tuesday.