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.
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.
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.