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Is ideological foreign policy a curse to the economy?
If you were a foreign fund manager, would you be willing to invest your funds into a country which is in bad terms with almost all of its neighbors and is “strongly condemned” by the US?
On Thursday lira depreciated against euro and dollar. The interest on ten-year Treasury bill reached 10 percent, and that on two-year bill exceeded 9.5 percent. The stocks exchange dropped sharply. As of Friday morning, the rise in exchange rate and interest rates stopped, but did not drop back again while the stocks index was floating slightly. Such sharp movements are not new in Turkey. It happened in 2001, 2004, 2006, and also more recently. But this time, there is an irritating detail. I would like to share that hoping that I am wrong.
I am citing from Murat Yetkin’s commentary from Thursday: “When the White House, who did not condemn the 3rd July coup in Egypt but “strongly condemned” the use of force against “protestors” following the massacre on 16th August, again “strongly condemns” Prime Minister Erdoğan in just a couple of hours for he blamed Israel for the coup in Egypt, we have to think twice.”
In any one of the reports about emerging market economies including Turkey, you will observe a familiar story nowadays. These examine the countries which will be affected at the highest degree by a possible halt of capital flows (foreign debt inflows). Turkey is among the few mentioned on top of the list. The reason is evident: the countries which will be affected at the highest degree are those which have the highest current account deficit and hence the highest foreign debt requirement. The picture is even worse for countries that have recently relied heavily on short-term borrowing. Just like Turkey.
Due to this, the current economic climate whets the appetite of conspiracy theorists. But we have to neglect the conspiracy and ponder on this: if you were a foreign fund manager, would you be willing to invest your funds into a country which is in bad terms with almost all of its neighbors and is “strongly condemned” by the US?
Please don’t think that I am talking through my hat. I am not a foreign policy expert and I do not discuss the foreign policy steps Turkey has to take. Of course I don’t like that Turkey has lately been in a hustle with the entire world and getting lonelier every day. But leaving all these aside and from an exclusively economic perspective, the risk perception about such country would increase, right? Particularly following the latest statements of the US.
Detailed studies are needed to identify the underlying reasons for the latest movements in economic indicators. You should not make sharp conclusions based on one-time fluctuations. Still, we have to ponder on why Turkey diverged from similar countries with sharp increases in the exchange rate and a sharp fall in the stocks market index. It is a non-negligible probability that the recent foreign policy developments and the rigorous statement of the US played a role in this.
Of course no country would change its foreign policy which it deems to be “right and realistic” radically just because the stock market dropped and exchange and interest rates increased. Assume that Turkey’s foreign policy is right. But is it really realistic? Does it protect Turkey’s best interests? A number of experts disagree. They emphasize that Turkey’s foreign policy is increasingly embracing an “ideological” perspective. Let’s wait and see what the days ahead are to bring.
This commentary was published in Radikal daily on 24.08.2013