Turkey rebalancing effort stumbles as growth falls to 1.6%

Financial Times (UK) Tuesday, December 11, 2012, p. 2

By Daniel Dombey in Istanbul and Funja Guler in Ankara

Erhan, a factory owner near Ankara, needs no reminding that talk of a booming Turkish economy is out of date. « There are serious difficulties in the market, » he said yesterday, on the day that the country reported an annual growth rate of 1.6 per cent in the third quarter of the year.

« Companies continue to buy or invest but they don’t pay, or they delay meeting their debts, » he continued, asking that his surname be kept private.

A similarly forbidding note was sounded by Mithat, who works in building, a traditional motor of the economy, which grew 0.4 per cent for the quarter, compared with more than 10 per cent in the same period a year ago. « There is unspoken economic tension, » he said. « Companies are putting on the brakes. »

Many people on the street voice confidence in an economy that became known for its dynamism after growth topped 8 per cent in 2010 and 2011.

« We have the best economy for decades, » said Veli, who runs a sandwich shop.

But yesterday’s figures signal that meeting those expectations may be a challenge after a government-engineered slowdown that was intended to bring Turkey’s current account deficit under control.

Not only were the gross domestic figures considerably lower than consensus expectations of 2.6 per cent compared with the same quarter in 2011, but they were also accompanied by data for October showing a 5.7 per cent fall in industrial production.

« A range of factors is coming together to slow the Turkish economy pretty dramatically, » wrote Timothy Ash at Standard Bank in a research note, citing the global growth slowdown, the eurozone crisis, the doubling of Turkish interest rates during the year, the impact of civil war in Syria on regional trade routes and the perception of political risk within the country itself.

In a recent Financial Times interview , Erdem Basci, the governor of Turkey’s central bank, said the deliberate cooling of the country’s economy, by interest rate rises and curbs on lending growth, was the first time that the country had managed a rebalancing away from domestic demand and towards exports in such a smooth fashion. He added that while exports were the source of growth this year, next year domestic demand would also be a positive contributor.

But both factors are under scrutiny. Gunay Elif Girgin, an analyst at Oyak Securities in Istanbul, said net gold sales of $6.6bn accounted for more than two-thirds of this year’s rise in exports.

She calculated that while Turkey’s exports rose 13.5 per cent for the first 10 months of the year, without the gold exports the increase would be just 3.3 per cent.

The gold sales have been spurred by Iran , which is trying to circumvent the problems of its sanctions-plagued banking sector and has been moving the precious metal out of Turkey, either directly or through third countries, as an alternative to cash. The US Congress is taking steps against the trade and it is unclear how sustainable the gold exports are.

Yesterday’s figures have heightened speculation about an interest rate cut this month, with some economists and analysts adding that a fall in inflation and increased bank lending will spur faster growth next year.