Confidence at Crisis Levels Shows Turkey Consumers Hit by LiraConstantine Courcoulas
Turkish consumer confidence dropped to levels last seen in the throes of a global financial crisis six years ago, complicating the job of policymakers seeking to stimulate the economy without exacerbating lira losses.
The steepest decline in confidence since 2009 coincided with the lira’s worst start to a year since 2011, with the currency dropping as much as 13 percent against the dollar. The yield on two-year government debt has increased 46 basis points this year, compared with declining borrowing costs in every other emerging market in Europe except Ukraine.
Those figures present a conundrum for central bank Governor Erdem Basci, who’s under pressure to cut rates and stimulate the slowing $800 billion economy even as doing so undermines the lira, further weakening consumer sentiment. It also means Basci’s ability to lower rates will depend partly on global forces outside his control, according to Deniz Cicek, an economist at Finansbank in Istanbul.
“The factors that affect consumer confidence are also factors that the central bank follows closely,” Cicek said by phone after the data was published on Monday. “As long as the pressure on the currency continues, the central bank will have to take this into account and implement a tight monetary policy. Yet if there are improvements in global conditions and inflation expectations, then the rate cut cycle may continue.”
Turkey’s state statistics institute reported yesterday that the consumer-confidence index fell to 64.4 in March from 68.1 last month, the lowest since March 2009 and missing the median estimate of 68.5 in a Bloomberg survey.
The plunge is the latest sign of weakness in economic activity. Industrial production unexpectedly contracted in January and unemployment climbed to a five-year high in December, the latest date for which figures are available. Economic growth probably slowed to below 3 percent last year from 4.1 percent in 2013, according to Deputy Prime Minister Ali Babacan. The country could also miss its 4 percent growth target for 2015, he said on March 13.
Meanwhile, prospects for higher U.S. rates have heightened concern over the vulnerability of Turkish assets as the government pushes the central bank for lower borrowing costs. While the bank will probably resume cuts after keeping rates on hold in March, the speed of any reductions will depend on the degree of lira stability and declines in inflation, according to Medley Global Advisors’ Nigel Rendell.
‘Walking a Tightrope’
“The central bank is still walking a tightrope - trying to balance sluggish growth against still-disappointing inflation news and lira volatility,” Rendell said by e-mail from London on Monday. The plunge in consumer confidence highlights the “downside weakness of the domestic economy” and “should argue for lower interest rates,” he said.
The lira fell 0.7 percent to 2.5595 against the dollar at 3:25 p.m. in Istanbul Tuesday, extending losses this year to 8.8 percent. Implied one-month volatility was at 13.9, up from an average of 10.8 in 2014. The yield on two-year notes rose one basis points to 8.47 percent, compared with a low of 6.78 percent in January.
“The economy is struggling to get traction and fire on all cylinders this side of the elections in June,” Timothy Ash, an economist at Standard Bank in London, said by e-mail on Monday. “This explains the huge pressure exerted on the central bank to cut rates.”
Turkey holds parliamentary elections on June 7. The ruling AK Party is seeking to extend its 13-yearlong rule for another four years to 2019, while President Recep Tayyip Erdogan lobbies for a large enough majority to grant him power to change the constitution and increase the powers of the presidential office.
The central bank lowered its key rate by 250 basis points to 7.5 percent since May amid politicians’ calls for faster and deeper reductions to boost economic activity. The rhetoric dissipated after Basci told Erdogan at a meeting this month that rate cuts should come only after a decline in the pace of inflation.
While consumer inflation is expected to slow to 6.6 percent this year, according to the median estimate of analysts in Bloomberg survey, the weaker lira will also feed into price growth.
Inflation rose to 7.55 percent in February, compared with 7.24 percent a month earlier. Sberbank’s Ozlem Derici revised her 2015 year-end target to 7.2 percent from 6.7 percent yesterday, citing larger-than-expected currency depreciation and further pressure on the lira from the prospect of Fed tightening. Sberbank also lowered its 2015 growth forecast to 2.5 percent from 3.8 percent.
“The central bank is unlikely to find an opportunity to loosen liquidity conditions,” Derici said in the report yesterday. “The volatility in exchange rates requires a cautious approach, and it would be a major mistake to cut the policy rate in an environment where depreciation is set to jeopardize the slowdown in inflation.”