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There is room for fiscal expansion if necessary
Countries that have a low public debt ratio have a larger room to react against economic contraction.
The Medium Term Program, the OECD and the IMF’s estimated the Turkish growth for 2012 at 4 percent, 3 percent and 2 percent, respectively. A sharp drop in growth rate is expected for two reasons: First, almost half of Turkey’s exports go to Europe, whose troubles imply a fall in imports from Turkey. Second, European banks are expected to lower credit supply substantially which means that it will be more difficult for Turkey to access foreign funds. The balance of payments figures for the last couple of months revealed this, as well.
Therefore, 2012 growth at the 1-3 percent interval seems reasonable. The possibility of contraction should also be considered if things get worse in Europe. What can Turkey to in that case? To answer this, it is needed to pay attention to the fact that such risk will mainly stem from the blockage of access to foreign finance.
During the first months of 2012, inflation rate will be slightly above or slightly below 10 percent. With that picture, it will be difficult to change the direction of the monetary policy with a convincing rationale. However, with a focus on the steps to counteract economic contraction, it can be argued that profit margins will narrow down considerably and a downwards pressure will be put on prices. Difficultly faced in accessing foreign funds will push up exchange rates and thus prices. If the downwards pressure proves stronger, this can be a convincing rationale considering inflation and the Central Bank can at least lower reserve requirements. Still, given the current climate, it is impossible to reach a concrete judgment about monetary policy. In fact, it is this uncertainty that forced the Central Bank to widen the interest rate corridor in the first place.
The fiscal policy steps are more definite. The figure below shows the degree of actual or declared steps to loosen fiscal policy in some emerging market economies starting with April 2009. Horizontal axis gives the ratio of fiscal policy loosening to gross domestic product (GDP) and the ratio grows as you move to right. Vertical axis gives the ratio of public debt to GDP and the ratio grows as you move up. The expected correlation is as follows: “Countries with a higher debt ratio introduces a lower degree of fiscal loosening and vice versa. This actually was the result. The curve shows this correlation, sloping from northwest to southeast.
In short, countries that have a low public debt ratio have a larger room to react against economic contraction. Of course, to be able to do this, they should not be facing a hike in risk perception due to some other reason. Otherwise, this action would make things worse. Turkey’s debt ratio is currently 41 percent, close to 40 percent recorded at the end of 2008. If deemed necessary, Turkey can implement a fiscal expansion to boost domestic demand. Some might argue, “Risk perception is remarkably high due to current account deficit. Such a policy would further the risk perception.” But this would not be a correct judgment, since the economy will eventually contract and thus the current account deficit will ease as the access to foreign funds will be hindered. Anyway, let us hope for the best so that such a policy will not be necessary.
Figure 1. Correlation between the level of public debt and expansionary measures during the global crisis (% to GDP)
This commentary was published in Radikal daily on 24.12.2011.