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    How to avoid head trauma

    Fatih Özatay, PhD15 March 2012 - Okunma Sayısı: 1008

    It is useful to keep in mind that fiscal policy can be a strong tool to slow down the economy, when necessary.

    Please think, what would happen if the Fed signaled that interest rates will be raised soon? Evidently, this would not be good for Turkey. But we know that the Fed will not be increasing interest rates anytime soon; all of the recent remarks state that attempts to raise the rates will earliest come by 2014. Of course, it is not possible to estimate the period after presidential election, which still marks a distant future. OK, what if Greece has to leave the Eurozone within a few months or Portugal also approaches toward the same path with Greece? Turkey would go through tough times, right?

    There is an important lesson to learn from the balance of payments figures for January. Between July and January, Turkey faced significant problems financing the current account deficit. More significantly, this was a period when the need for financing, that is, the current account deficit, was steady. Concerning cumulative figures for the preceding three months for each month, net financing stood below the financing need in June the latest. Since then, net finance has been far from meeting the financing needs, despite monthly fluctuations. Between July 2011 and January 2012, average net financing comprised only 60 percent of the financing need.

    We all know why. During the second half of 2011, international financial markets became tense due to the crisis across Europe. Risk appetite of international investors decreased substantially; they started to pull up stakes in emerging market economies and ceased bringing any more “stakes.” In this context, Turkey, which was recording high current account deficits and meeting the financing requirement predominantly via short term borrowing, came to the attention. This is how the current picture emerged and net capital inflows to Turkey decreased. The most blatant outcome was the rise in the exchange rate: the value of the Dollar-Euro FX basket reached as high as ¨2.20. As a result, the Central Bank of Turkey (CBT) had to allow overnight interest to increase to 12 percent and intervened in the market several times by selling FX.

    Evidently, during February and March, Turkey did not suffer from a problem as severe as it had been last year. Developments on the exchange rate confirm that it did not. The value of the FX basket decreased to ¨2.02 from ¨2.20 and currently floats around ¨2.06. The key facilitator was the injection of three-year maturity Euro 1 trillion by the European Central Bank with two actions, one in December and one in February. The liquidity boost strengthened the risk appetite.

    Turkey has to take action to break the sensitivity of economic stability and growth to international risk appetite. Of course, it is something easy to say but difficult to achieve. I will not enumerate the structural reforms required to achieve this. Before that, we need to comprehend the ABC of the issue. During the second half of 2010 and the first half of 2011, when the growth was strong, we had to slow down a little bit. Especially during the first half of 2011, however, it was the CBT alone who occupied itself with this task. And its efforts yielded no results. There was not any institution other than the CBT which made effort to slow the economy down. As of today, we missed that opportunity. There is no need to slow down anymore.

    Still, we have lessons to learn. For starters, therefore, we need to change our perception. We have to acknowledge that bright days cannot last forever. It is useful to keep in mind that fiscal policy can be a strong tool to slow down the economy, when necessary. Otherwise, it will be foreign investors who stand on the brakes and us who fall out of the windshield and suffer a head trauma.

    This commentary was published in Radikal daily on 15.03.2012