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.

A Recession Ahead?

I might be the luckiest blogger posting about economics around the cyber world. My last post was questioning if Turkish Central Bank has enough foreign exchange reserves or not, I used some metrics to get the question answered such as gross foreign exchange reserves to short-term foreign debt ratio (see it here). The results were clearly not pretty. And we all know that what happened then. Turkish Central Bank could not stop lira depreciating even if it intervened directly and sold around $3.5 billion. That was just what happens when a central bank loses control. Despite the biggest the foreign exchange sell in its history, what we saw was just a further depreciation in lira.

and this morning we saw some headlines…


In the past, shocking interest rates hike decisions were made in the extraordinary meetings held by Turkish Central Bank. Expectations for the hike ranges between 200 and 500 basis points (JP Morgan and UBS expect a 300 bps hike). Considering the inflation expectations, raising rates is what needed to be done even if it is late. This will probably have the effect over time of cooling the economy and bringing down inflation.

Cooling the economy causes some crucial questions to be asked at this stage. So how is Turkey doing? Is it generating enough income to challenge the Fed tapering and able to make the entire emerging markets proud?

One can engineer thousands of pre-indicator for estimating the business cycles in Turkey, and GDP growth as well. This is where I am cutting corners and using the Capacity Utilization data, that of, change in annual percentage determines the 95% of annual real GDP growth.

Turkey - Capacity Utilization Ratio and GDP

Hope Turkey will do better than I expected.

Capacity Utilization Drops in November

Capacity utilization rate (CUR) was realized at 75.6% in November. It means an increase 160 basis points compared to last year but a slight decline month over month by 80 basis points. Seasonally adjusted CUR also dropped to 74.9% by 90 basis points.

Looking at the figures from a broader perspective, the CUR had hanged around 80% in the pre-crisis period of 2008, then following the collapse of Lehman, it dramatically plummeted to 60% as a result of the global recession. Despite the worthy of note improvements, it is still lower than pre-crisis period but also this suggests that Turkey can increase production without causing a rapid upside change in inflation.

Turkey - Capacity Utilization Rate

Business confidence stayed above 100 but demonstrated a slight decline in November. Even if the volume of output supportively remains the same, the significant fall in export orders had been the key factor. Ahead of elections, I clearly do not see macro sign to boost the investment.

Beside of decreasing export orders, the trend line in stocks in process does not seem pretty. We have an upward move in November data but the stable outlook is sign of the weakness of consumption. However, by this, a limited weakness in inflation is expected in the next months depending upon the output gap.

Turkey - Real Sector Confidence Index

Turkey - Stock in Process