Investment Expenditures by Businesses

In a previous post about Turkey’s GDP growth, we mentioned the investment expenditures of the private sector as the weakest part of the economy. Poor track record in the component has been undermining the growth for a dozen of quarters. Companies allocating less money to extend their businesses also have rising concerns around the sustainability. Because investment expenditures play a central role in macroeconomic activity affecting both short-run business cycles and long-run economic growth. These expenditures reflect the general act of investment involving foregoing current satisfaction to produce capital goods and are officially measured by gross private domestic investment.

The results of the survey of business posted by the Turkish Central Bank yesterday showed the real sector confidence index gaining momentum, hitting a 12-month. However, on the investment side, things still looked gloomy. Despite the rising confidence we saw a monthly drop of 1.6% in investment expenditures in October which was 6% lower compared to its January high.

Investment Expenditures and Business Confidence

Another important point is that the relationship between Turkey’s highly controversial monetary policy and risk appetite of the businesses while making investment decision. As seen from the chart below, Turkish businesses were more proned to invest despite the high funding costs and since then interest rates seem to have had a strong influence on investments. In other words, it is not only higher rates that erode investment confidence of Turkish companies as the investments evidently lost momentum followed by a nosedive in investor confidence.

Turkey - Interest Rates and Business Confidence

One thing Turkish politicians need to clearly understand is that the central bank is not able to provide a permanent solution for the weakness in investment expenditure by businesses.

Confidence Indicators Signal A Tragedy

After the shocking interest rate hike by Turkish Central Bank that made many people mesmerized late at night, we have seen how Turkish Lira has turned into a hit and run for traders as it reached at 2.31 per dollar after breaking below 2.17. The decision was interpreted as that Turkish Central bank regains the credibility that it lost (last week). Well, taking a look at the exchange rates, it seems like credibility is lost again but may be gained back again by tomorrow. In my humble opinion, what matters is to simplify the policy that is actually done.

Yesterday, I noted that CBT sees possibility of serious slowdown. After blowing the rates everyone does so. Here is another post that highlights the damage on economy upon some economic data points. Even worse, all confidence indicators we have for Turkish economy are slumping dramatically.

Turkey Business Confidence Index

Turkey Business Confidence Index2

The first chart above demonstrates that how Capacity Utilization Ratio, Real Sector Confidence Index and Consumer Confidence Index have been sliding for the last two months. More is the pity we have had consumer data since January 2012. For this reason I generated the second chart only showing CUR and RSCI starting Jan 2007.

Excepting the slight increase in CUR on last November, these two indicators have been losing momentum in four consecutive month. Wondering what happened the last time these two indicators did the same pattern? We had the similar performance between June and October in 2008 that was followed by negative growth period lasting for four quarters. Certainly global conditions built a positive case for Turkey neither in 2008 nor today.