The reason why Turkey would be affected more severely by the mentioned global circumstances if faced today is that today Turkey is encountered with bigger vulnerabilities.

If the external conditions which had been witnessed in the harshest days of the 2008 global crisis were faced today, Turkey would have been affected more severely. Why? Before the answer, we had better take a brief look at that period.

After the bankruptcy of Lehman Brothers in fall 2008, the financial crisis that had already erupted in some developed countries intensified and spread almost to the entire world. The global crisis affected Turkey through four channels: first, the banking and corporate sector could not renew the foreign borrowing options which they used to benefit from abundantly. Second, the banking sector decreased the domestic credit supply. Third, world trade narrowed down severely affecting Turkey, the exports of which were predominantly directed to the countries in severe crisis. Fourth, in the mentioned milieu, both producer confidence and consumer confidence hit the bottom and thus spending dropped. As a result of these developments, the Turkish economy contracted by 4.8 percent in 2009. Unemployment rate, which stood at 10 percent before the crisis, reached 14 percent in average in 2009. In short, Turkey was deeply affected by the crisis.

Vulnerabilities are bigger

The reason why Turkey would be affected more severely by the mentioned global circumstances if faced today is that today Turkey is encountered with bigger vulnerabilities. Budget balance, public sector borrowing requirement and the ratio of public debt to the GDP reflected no problem either in 2009 or today. The same conclusion can be reached also in terms of the financial sector. Financial system was sound before the crisis; and it still is. But, let me note one striking point: according to the Central Bank (the CBT) data, short term foreign borrowing by the financial sector increased substantially from US$ 9.2 billion in 2008 to US$ 23.2 billion in May 2011.

I think now you can guess the underlying sources of the vulnerability: first, an increasingly higher proportion of the current account deficit is financed by short term borrowing. The second problem I noted following the argument on the soundness of the financial sector is associated with the short term borrowing issue. There exists a third reason why the vulnerabilities facing Turkey are severer today than the pre-crisis period: senior officials have frequently addressed the current account deficit problem, however, they have not given the necessary policy response yet. It was the CBT alone on the stage for a long period. But it was evident that the new monetary policy will not work unless the Banking Regulation and Supervision Agency (the BRSA) steps in (I have stressed this countless times at this column beginning with the last months of the 2010). The BRSA stepped in with a huge delay. Despite this fact, the CBT insisted on the same monetary policy. In addition, international financial circles could not acknowledge the new monetary policy framework the CBT has drawn. No steps were taken to solve the voiced problems with the fiscal policy, either. For instance, it was not explained how the additional revenues coming from the tax amnesty will be used.

External circumstances are not that bad

This is where Turkey is lucky: external conditions are not as bad as they were in fall 2008. The two important sources of concern are the European Union (EU) and the US. The EU has finally introduced some worthwhile decisions. And the world expects that the conflict in the US between the Democrats and the Republicans on the borrowing limits and the budget expenditure items to be contracted will be over soon.

Yet, I have to say that, under the assumptions that the EU will mobilize the will to solution that was finally initiated also for other problem areas and that the conflict in the US will be smoothed over, Turkey has time to reduce these vulnerabilities. In other words, it is much more useful to take action rather than to talk. Then, what is the Turkish economy prone to in the following period? Let us discuss on Thursday.  

This commentary was published in Radikal daily on 26.07.2011