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If the economy has vulnerabilities, you need to focus on and try to overcome these instead of praising the economic performance. That’s the responsible thing to do.
For the last couple of weeks, Turkey has been raised by international financial institutions among the countries that would be affected most adversely by the latest developments in the financial markets. In some of these institutions’ reports, Turkey is on top of the list. What is going on? Was the Turkish economy not a shining star? Why now it is pronounced among the most vulnerable economies of the world?
The risk perception concerning a potential policy reversal by the Federal Reserve (FED) has been on the hike lately. As a result, interest and exchange rates in emerging market economies have escalated. Countries like Turkey will face FX outflows as soon as the FED starts to withdraw liquidity it has generously injected since 2007. The overall amount of the outflow will depend on the length and the scale of the withdrawal operation. It would be okay if the impact of the outflow would be limited to interest and exchange rate. Depending on the magnitude of the outflows, it is expected that the corporate and banking sectors will face trouble in repaying loans from abroad set aside obtaining new loans, and that the confidence in the economy will weaken. This means less investment, slower growth and higher unemployment.
Such is overpraising. The more the performance is praised, the more people start to believe that the economy is sound and solid. Soon after, this belief becomes faith; people stop recognizing problems and shut their eyes to critics. This mood also encourages risky economic policies, particularly in “certain” periods. Let’s say elections are ahead. The economy is freewheeling at full speed, but you are not willing to gear down. You think that you can take measures after the election. Meanwhile vulnerabilities grow, but thanks to the “shining like a star” illusion, you think that you can keep the process in check.
In 2010, Turkey had a record high current account deficit. The foreign borrowing requirement was unprecedented. But thanks to the generous quantitative easing policies of the FED and central banks of rich countries, it was easy to access funds. The problem was that the funds were rather short-term and would flow out as easily as it flew in, particularly if the FED reversed its policy.
The election was due in 2011. By the end of 2010 the Central Bank of Turkey initiated certain steps. But other institutions and policies that should have step up so that the Bank’s policies work did not come into play until the elections in June 2011. In the end, current account deficit to GDP ratio broke the 2010 record at 6 percent and reached 9.7 percent in 2011. Setting aside the countries that we have not heard of before as well as small African countries, this was the highest current account deficit over GDP ratio after Albania, Armenia, Georgia, Jordan, and Greece. Turkey is the seventeenth biggest economy of the world, with a current account deficit remarkably higher than those of the top twenty.
Such is overpraising. While you are busy with appreciating yourself, vulnerabilities grow. You might ask if there is not a single thing to be proud of. There was of course, as I have raised on this column several times. But the fact remains unchanged: if the economy has vulnerabilities, you need to focus on and try to overcome these instead of praising the economic performance. That’s the responsible thing to do. Some of you might question how people dangerously sharpening the “others” and “us” segregation can act responsibly when it comes to economy. The decision is yours.
This commentary was published in Radikal daily on 25.06.2013