Where Will the Economy Orient Itself?

While the Covid-19 epidemic and the global economic crisis continue, unfortunately, there is no comprehensive solution at the global level yet. Heavy debt burdens are feared to create a permanent global divide between rich and poor countries. This is a difficult problem to answer and currently it is one of the most important topics in the world. So, how is Turkey building its future in this transition period? Will the extraordinary efforts of the business world be enough to meet the new era? Where will the compass of the economy turn in the next period? We searched for answers to these and similar questions...

Despite the colossal monetary and financial measures taken by governments, approaching 20 trillion dollars in combating the Covid-19 epidemic, 2020 has gone down in history as one of the worst years that the global system has experienced since the Great Depression of 1929. In this period, Turkey experienced a rapid recovery process with effective loan growth. However, unemployment remains a serious problem. With the discovery of the vaccine, the light appeared at the end of the tunnel. At this point, instead of focusing too much on out-of-control situations, it is critically important to focus on the innovations obtained with the transformation and the benefits they bring, and to ensure their continuity. The recent steps taken by the Turkish economy management and the Central Bank will play an important role in the stabilization of the Turkish economy.

FAST RECOVERY IN 2021

Turkey managed to be one of the fastest-recovering economies in 2021. Let us remind you that among the G20 countries, only China and Turkey closed 2020 with growth. The first quarter of 2021 passed with stronger recovery signals for Turkey. Successful results in the vaccination process also strengthened this view. In this period of permanent recovery, leading indicators are above the pre-pandemic period. Still, employment and public finance issues will be on the near-term agenda. In addition, ongoing support and inflationary pricing of the markets cause confusion from time to time. According to the authorities, support is still needed and we are far from total recovery in the economies. Markets are pricing in the side effects of an abundance of money supply. In summary, although downside risks have strengthened compared to the end of last year and some of them have been realized, it is possible to say that 2021 will be more positive than 2020.

TURKEY 2 QUARTER RESULTS

GDP grew by 21.7 percent in the second quarter of 2021. In the second quarter, the agricultural sector grew by 2.3 percent, the industrial sector by 40.5 percent and the services sector (including construction) by 20.5 percent. In the said period, while total fixed capital investments increased by 20.3 percent; Private consumption and public consumption expenditures increased by 22.9 percent and 4.2 percent, respectively. The contribution of net exports to growth was 6.9 points. Construction investments increased by 12.2 percent in the second quarter of 2021, while machinery and equipment investments increased by 35.2 percent. In this period, the contribution of private consumption to growth was 13.7 points, while public consumption contributed 0.7 points to economic growth.

PUBLIC DEBT IS AT A MANAGEABLE LEVEL

The Turkish economy is expected to grow strongly in 2021 and 2022, with base effects and a recovery after three years of ups and downs. Euler Hermes Senior Economist Manfred Stamer says, “According to our calculations, public debt in Turkey, which was 33% of GDP in 2019, increased to 37% of GDP with Covid-19. In terms of public debt, this shows that we are in a relatively low and manageable position compared to peer developing countries.” But is there a medium-term risk for Turkey in public debt? Let’s look at the Public Debt Sustainability Risk Score table prepared by Euler Hermes. There are 101 developing countries here. Among the 20 most risky developing countries are Egypt, South Africa, India, Brazil and Pakistan. The table states that countries marked as “most vulnerable” are most likely to seek financial support from international lenders, resort to debt relief, restructuring initiatives, or default on their public debt. Stating that Turkey ranks 30th in this table, Stamer says, “This means that we do not expect Turkey to default or restructure its public debt in the next two years. However, the ranking also points to a medium-term risk. The next two years are critical.”

WHAT CAUSES THE CONTRADICTION?

Economist Mahfi Eğilmez strikingly reveals the current situation in an article that he published on his blog. In the analysis published in July, Eğilmez points out that when you look at the market and people in Turkey, there are two different worlds. Eğilmez says, “The majority of the society either cannot make a living or they get by with debts. On the other hand, another group seem to be spending on a high-level. Although housing sales have decreased slightly compared to last year, they still seem to be very high; automobile sales are breaking records, shopping centers in cities are overflowing, traffic seems extremely heavy, there are no vacancies in holiday spots, restaurants and cafes that opened after the epidemic are starting to fill up, e-commerce has the highest sales of all time.”

Taking the sales of automobiles and light commercial vehicles as an example, Eğilmez says that, except for a few months since June of last year, sales were above the ten-year averages, and in the first six months of this year, they have been well above the first six months of last year. “The amount of sales in cars classified as luxury and super-luxury has increased by 41 percent in the first six months (198,336) compared to the first six months of the previous year (141.139).” When we look at the official data, Turkey’s GDP was 951 billion dollars in 2013 and the average annual income per capita was 12,480 dollars. Today, GDP is about 750 billion dollars and per capita income is about 9,000 dollars. In other words, our revenues have decreased by 30 percent in the last seven years.

On the other hand, the market seems extremely lively as we mentioned above. This means that even though our incomes have decreased, there is an increase in demand in many areas and the economy remains alive. How can this contradictory situation be explained? Eğilmez answers this question as follows: “The depreciation of the TL against foreign currencies, in other words, the exchange rate increase we constantly encounter increases prices and creates an expectation that inflation will increase even more. So, people are trying to replace their cars, white and brown goods, furniture with a new or better one as soon as possible before the prices go even higher. They even go further and stock up on non-durable consumer goods before prices rise any further.”

INFLATION DISCUSSIONS

In mid-June, IS Investment International Markets Director Şant Manukyan made remarkable evaluations to Anadolu Agency about the latest developments in global financial markets and the monetary policies of central banks. Manukyan emphasizes that uncertainties have shifted in the current period, and that the issues discussed in the past months, such as how the epidemic will progress, are left behind, at least for some of the developed and developing countries. Pointing out that uncertainties such as the inflation trend, how the central bank policies will be shaped and growth are now being discussed, Manukyan says that it may take time for them to disappear. Stating that the issue of when the Fed will start tapering will be clarified by the end of August, Manukyan says, “On the other hand, the discussion on inflation will take a little longer. Are current levels of inflation temporary, or are inflation dynamics actually changing? We see that the Fed has convinced the market that inflation is temporary, but if this is not seen a little more clearly in the figures until the 4th quarter, I think that inflation dynamics may emerge again more strongly.” Emphasizing that elimination of uncertainties about growth depends on the policies of the USA and China, he adds: “What we do not know clearly on the US side is how much of the budget will pass. There are midterm elections in the USA in 2022. If Republicans gain an edge in the Senate or House of Representatives in these elections, it will create uncertainty about spending. On the other hand, it will be important for the Chinese side to switch to a normal growth path next year. Therefore, we will be able to gradually remove these uncertainties. I think the timing of the Fed to start tapering will be clear by August, while others will take a little more time.” Yes, it is possible to summarize the general economic situation in this way. On the other hand, innovations brought by technology, especially blockchain, are gaining more importance on the agenda of the business world. According to experts; ensuring its continuity in the new period is critically important.

THE BLOCKCHAIN REVOLUTION IN TRADE

Trading with blockchain, which is accepted as a foreign trade policy by the EU Parliament, is on the agenda of the Turkish business world. Blokchain Turkey Platform, in its study titled ‘Blockchain for Supply Chains and International Trade’, emphasizes that blockchain is of vital importance for the Turkish economy, which has a high trade volume with the EU. 45 countries are working on blockchain developments on both the business and technology areas. The World Trade Organization, OECD, World Customs Organization also carry out these studies, but the European Union is at a very advanced level. In our country, we are trying to raise awareness on this issue. According to experts, we need this for sustainable trade. It is predicted that 36 original and 240 copy documents flow in an average foreign trade transaction; which makes the process open to error and abuse. Therefore, blockchain stands out as the most suitable technology for foreign trade. For example, while the average transit time of a vehicle is eight hours, even with digitalized customs, this time can be reduced to 30 seconds with blockchain technology. With blockchain, insurance companies can also make risk analysis and assessment much more clearly. Blockchain has a very important role in the prevention of counterfeit products in the origin insurance provided by the chambers of commerce. These certificates will bring effective solutions for the problems of European brands. In the food sector, Walmart can detect the origin, which it detects in 6 days with the traditional method, in 2.2 seconds with the blockchain.

WHY DO COMPANIES INVEST IN BITCOIN?

Cryptocurrency is a very young market. And it has many risks. Because regulations are new. There are over 10,000 crypto assets on the market. According to experts, most of which will not be entered as assets. Tesla made the headlines in February when it announced that it would invest $1.5 billion in Bitcoin. However, Tesla, the electric car maker, is neither the first nor the only US company to make a significant Bitcoin investment. But why do listed companies invest in cryptocurrencies? Microstrategy was the first US company to enter the crypto market with a large investment. Microstrategy, a software company, invested $250 million of its financial reserves in Bitcoin in August 2020. Since then, it has been buying more and more cryptocurrencies. After the sharp price drop in mid-May, the company’s CEO, Michael Saylor, announced that they are buying more Bitcoin. About a month ago, the total value of the company’s BTC holdings was equivalent to $2.25 billion.

The Microstrategy CEO now sees himself as a crypto advocate and recommends Bitcoin as a store of value for companies, and advises other company executives to enter the crypto world. In an interview with Time Magazine, Saylor implied that his tweets to Elon Musk were partially influential in Tesla’s investment in Bitcoin. But why are big companies investing their reserves in cryptocurrencies? Saylor says the billion-dollar investment for Microstrategy is a hedge against inflation and asserts that its mission is to “fix the balance sheets of the world”, saying “Bitcoin is digital gold.” At Tesla, this mission is likely to come true soon. The company announced in its report for the first quarter of 2021 that it made a profit of $ 101 million from the sale of Bitcoin. Even though Tesla announced a few weeks after that it will not accept Bitcoin as a means of payment for now, it still holds Bitcoin.

Square, a payment service provider, started investing in Bitcoin last fall. It is stated that their Bitcoin reserves are currently valued at 220 million dollars and correspond to 5 percent of its liquid assets. In the first quarter of 2021, Square reported a loss of $20 million. The company does not want to invest more in Bitcoin for now. Square seems to be committed to the environmental issue of cryptocurrencies with its “Bitcoin Clean Energy” initiative. Pressure for Bitcoin as an investment strategy for big companies comes mostly from the US. In a global CFO poll by CNBC, 80 percent of respondents saw Bitcoin as neither a payment method nor a bubble that should appear on balance sheets. However, current developments show that digital assets can be an alternative investment strategy not only for private investors but also for companies.

Fintech investments are breaking world records

As a guest of the Financial Technology program on Bloomberg HT television, SC Management & Consultancy Founder Dr. Soner Canko said that in the next five years, digital currencies of central banks, called CDBC, will be used in five of the world’s 10 most developed economies. Noting that they expect big changes in the technologies used in banking in the coming period, Canko said, “We foresee that the data management that we have done in our own fields in large data centers so far, especially with cloud technologies, will be transferred to the cloud and that the technologies used in banking will undergo a great change in this sense.” Canko emphasized that especially with the pandemic, there is a transition from physical and traditional commerce to e-commerce and the changing e-commerce experience is on the agenda.

Canko added that the applications that talk to each other, as well as accelerating, facilitating and simplifying customer demands are now on the agenda. Remarking that another important issue on the agenda is data platforms, Canko says, “Until now, operating systems have been used to run computer technologies. From now on, operating systems are needed to manage big data. In this sense, a major transformation and change is expected in financial technologies. We can say that the operating systems and platforms on which the data is managed are waiting for us in the future.” Canko added that they observed that traditional banks are no longer as quiet as they used to be, they are accelerating and responding to the development in the field of fintech in their own way. Noting that there were good developments in the Turkish fintech sector in the first half of 2021, parallel to the figures in the same period of the previous year, Canko stated that there is an investment of 11.5 million dollars with 11 investments. Expressing that private equity investments are not included in the figures, Canko said that with the addition of that amount, fintech investments are above last year. Canko added that the exit figures in the first half of the year, although lower than last year, were realized at 27 million dollars. Stating that 5 fintech startups were established in Turkey this year, according to Startups.watch data, Canko said, “This is a remarkable factor. The number of fintech startups should not slow down. They should increase. We should encourage fintech entrepreneurship.”

ZEYNEP AKTAŞ

ECONOMY AUTHOR

‘Interest and inflation will be on the radar in the last quarter’

“As we approach the last quarter of the year, the main agenda of the investor is that savings do not melt down in the face of inflation. Eyes are on what will happen to the interest rate in the market. There are new areas of action in the markets. Because we are approaching the last quarter of the year. The investor’s agenda includes not melting the savings in the face of inflation and what the interest will be. Investments are these two “The money is still in TL due to the withholding tax advantage in deposits. At this stage, the money is still in TL. However, after the statements of CBRT Chairman Şahap Kavcıoğlu, it has been interpreted that the interest rate may remain below inflation. Therefore, portfolios are reshaped. It will cause new money inflow. Unless steps are taken, these levels may remain as a base in exchange rates.The following five issues stand out on the market’s agenda:

1- Developments regarding central banks,

2- The course of foreign markets,

3- Developments related to inflation,

4- What kind of interest rate decision will be made by the Center,

5- Uncertainties regarding the pandemic process.

MAHFİ EĞİLMEZ

ECONOMIST

INFLATION-INTEREST

“Recently, the cause-effect relationship between inflation and interest has come to the fore again. This time, the debate was on whether inflation would decrease or not, when the interest rate increases rather than the cause and which is the result. First of all, in order to answer this question correctly, we need to establish the cause-effect relationship correctly. Inflation comes in two forms: Demand inflation and cost inflation. Demand inflation is caused by the quantity demanded more than the quantity supplied. The most well-known reason for this is the excess money supply in the market. If there is more money in the market and less goods, When there is inflation, one way to prevent this type of inflation may be to increase interest rates. If interest rates increase, people tend to cut back on consumption and save, which eliminates excess demand in the market and inflation can be curbed. does not choose the money in their hands they try to spend as soon as possible and reduce the effect of inflation. Especially if there is a widespread belief that the measured inflation is wrong and that it should be around 30 percent, then they tend to stock up on whatever they can find. This increase in spending leads to a further increase in inflation. So, if demand inflation is valid, then it is necessary to measure inflation correctly, explain the real situation, and determine the interest rate above that rate. If this is not done, if the interest rate is determined below the real inflation, then an increase in interest cannot prevent inflation.

Cost inflation; It arises by reflecting the increases in the factor prices (wages, interest, rent and profit) that are included in the production costs or the various inputs used in production (electricity, natural gas, water, etc.) The way to prevent this is not an increase in interest rates. On the contrary, it may create an inflation-increasing effect here, due to reasons such as an increase in interest rates and an increase in credit costs. There is only one exception to this: Exchange rate increase. If a production system produces using intensive imported inputs, then it is very affected by the exchange rate increase. Exchange rate increase is an important part of cost inflation. It is not possible to solve the exchange rate and inflation problem forever by increasing interest rates. Therefore, it is necessary to set up the relations equation correctly and create the solution accordingly. The relationship discussed today looks like this: Inflation- Interest. However, this is only the tip of the iceberg and it is not possible to produce a permanent solution by looking at it. At best, temporary solutions can be provided by increasing the interest rate. The real situation is as follows: The part we are discussing is just this last Inflation – Interest rate issue. That’s why we can’t come up with a permanent solution. In order to produce a permanent solution, we need to start from the beginning with how we can eliminate the high risk of the country. When its end is based on structural reforms, we skip all of them and come to the last relationship and remain unsolved: Inflation-Interest.”

Economic confidence index increased

According to the statement made by the Turkish Statistical Institute (TURKSTAT), the economic confidence index, which was 97.8 in June, increased by 2.3 percent in July to 100.1. The increase in the economic confidence index is due to the increases in the real sector (manufacturing industry), services, retail trade and construction sector confidence indices. Real sector confidence index increased by 2.1 percent in July compared to the previous month and reached 112.1, services confidence index increased by 5.8 percent to 114.8, retail trade confidence index increased by 3.7 percent to 109.6, construction confidence index increased by 4.7 percent to 86.3. Consumer confidence index decreased by 2.7 percent to 79.5.