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    It’s not too late

    Fatih Özatay, PhD25 May 2013 - Okunma Sayısı: 1133

    Despite all the praise and credit, no country is immune to crises. This is a critical lesson to learn.

    Do you remember the well-known economic crisis in Mexico, also known as the Tequila crisis? It was unveiled gradually in the second half of 1994. In December, the government declared a devaluation of the peso by 15 percent, which was followed by the crisis. In March 1995, the dollar/peso exchange rate was doubled. Of course, the story is not that simple; but this is not the concern of this commentary. If you are wondering why I have raised this two-decade old crisis, let me put a reminder here: a month before the crisis erupted, the US press had featured op-eds and commentaries about how bright the economists of Mexican economic management were and how the country had done economic miracles.

    In the mid-1997 a crisis erupted in Thailand and it rapidly spread to four other Asian economies: Korea, Indonesia, Malaysia, and Philippines. The crisis continued in 1998. If you are wondering why I raised the 15-year-old Asian crisis, here is another reminder: before the crisis, Asian economies were highlighted as major success stories and called as the “Asian tigers.”

    No, I am not trying to draw an analogy about Turkey here for Turkey is not faced with the risk of a crisis resulting exclusively from domestic economic vulnerabilities. But there are lessons to learn from the cases of Mexico and Asian tigers. Despite all the praise and credit, no country is immune to crises. This is a critical lesson to learn.

    Having noted this, the damage done by the global crisis must be recalled. Before the global crisis, Turkey has low public debt a solid banking sector, and moderate inflation and real exchange rate. The global crisis, however, severely harmed the economy: the decrease in the gross domestic product (GDP) was as much as that after the 2001 crisis. It took nine quarters for the GDP to re-achieve the pre-crisis level. Unemployment rate increased by 5 percentage points and only after three years fell back to the pre-crisis levels.

    In the pre-crisis period there have been (and currently are) two main sources of vulnerability for the Turkish economy: first is the low savings rate and second is the high level of FX debt compared to FX earnings. These two have become even more blatant now. Before the crisis, back in the 2005-2007 period for instance, savings rate was slightly above 15 percent. In the 2010-2012 period, it averaged 14 percent. Both are unsatisfactory, but savings are even weaker today. The net investment position to GDP ratio was minus 48.6 percent in 2007 and minus 52.6 percent in 2012. Moreover, the deficit increased further in the first three months of the year.

    Turkey has to mitigate these vulnerabilities. The current monetary policy perspective in developed countries impedes Turkey’s ability with this respect, however. Generous quantitative easing schemes and lowest-low interest rate policy they introduce to revive their economies aggravate the challenge for Turkey. Yet, we have to not add fuel to the flames by reducing the savings rate further. The interest rate policy must be reviewed with this perspective. It isn’t too late.

    This commentary was published in Radikal daily on 25.05.2013