Add to this picture the political uncertainty the massive bribery and corruption probe will cause.

Recently, I attended a G20 meeting in Sydney. The meeting was on the G20’s 2014 agenda. One of the chief objectives of the G20 is to ensure more inclusive decision-making processes. The participants asked about inclusiveness and the steps to take.

My response was as follows: “Ben Bernanke, chairman of the Federal Reserve (FED) is capable of directly affecting the lives of people in emerging economies, including Turkey. The chairman of the FED is appointed by the US president and approved by the US Congress. We have no role whatsoever in this process. Yet we bear the consequences directly all together.” “If we are to set a primary objective for the G20, assigning the FED chairman by international consensus might be something to consider.”

I added. True, Turkey’s Central Bank (TCB) has lost reputation mainly because of its own actions and incoherent decisions. True, Turkey’s central bankers are largely responsible, but we have to admit that it was an unprecedented period. I don’t get the debate about why TCB governor Erdem Başçı has been talking so much, either. My point of view is that, there is no harm in him talking so much, only if he thought more before he spoke. The day before, the FED had declared that since the US economy was doing well, it would start tapering the excess liquidity in the market. In other words, the FED would start mopping up the water that had spread all over the floor when it was injecting liquidity. If the FED starts mopping, it means monetary tightening for us. That’s the rule. Let me tell you why.

We enjoyed a massive quantitative easing due to the crisis that erupted at the heart of the global economic system. It was also when the FED started to expand its bonds and notes portfolio with the aim to support people who had invested in US treasury bonds and notes and hence prevented further losses. Please remember that the CBT also initiated such an operation, back after 2001 crisis. That portfolio was later deflated. The FED is now on the same path of reducing the size of its bond portfolio. Hence, the majority of the bonds and notes will be borne by markets. Bond prices will decline and interest rates will increase by some degree. The critical detail here has to do with the reason why the FED has initiated the tapering operation.

The FED has initiated gradual tapering because the US economy is almost ready to leave the intensive care room; because the signals for recovery have been strengthening. The FED is halting its support of the market because the latter is now capable of fulfilling the task on its own. What does this mean for the rest of the world? This is good for the developed world; both good and bad for Turkey and similar countries. The lower the current account deficit and the bigger the export potential, the better this is for developing countries, and vice versa.

Of course, what should grab our attention is the share we will get from the FED’s tapering operation. In June, Bernanke said that they won’t support the markets forever and that soon the time for tapering would come.. And then came some major turbulence. Countries that were affected to the highest degree were Brazil, India, South Africa, Turkey, and Indonesia. The Istanbul Stock Exchange (BIST) index declined by 12 percent, which meant Turkey was among the top five countries impacted by the FED decision. Domestic currencies depreciated in all five countries; Turkey ranked fourth with an eight percent depreciation against the dollar. The Brazilian real depreciated by 13 percent, the Indian rupee by ten percent, and the South African rand by nine percent. Risks escalated in all of these countries, most so in Turkey. The decline in reserves was prominent in all five, where Turkey ranked second after Indonesia. These happened only because Bernanke announced the quantitative easing would be tapered sometime although no action was taken. Now, we know when and at what level the tapering will be initiated. How will it affect Turkey? In the way it did in previous cases.

Yesterday, Barry Eichengreen wrote on www.voxeu.org about the lessons to learn from the process between Bernanke’s remarks and today. Let me share my observations with you. First, if the FED starts tapering, it does not necessarily mean monetary tightening for the US. But we have to expect a tightening for the Turkish economy, which enjoyed a wider spectrum of borrowing opportunities in the times of quantitative easing in the US. If the world economy is at the dawn of normalization, we have to realize that Turkey will have difficult time financing its current account deficit of five to six percent. It was thanks to the FED’s quantitative easing that Turkey was able to bear a current account deficit as high as ten percent and manage the process with ease. The wind was on Turkey’s side, but it will calm down now.

Second, foreign portfolio managers mostly leave markets where exit is the easiest. The most liquid markets are hit the hardest. Why? Because the floating exchange rate regime is in effect all over the world. The more efficient financial infrastructure of an economy is, the harder it will be hit. So it seems that the more the CBT opens auctions and slows down the exchange rate, the higher the outflows will be. Third, add to this picture the political uncertainty the massive bribery and corruption probe will cause. This is inevitable, you know. For Turkey, 2014 will be a year to preserve what it has, not to make gains.

Given the weather conditions in the high altitude of the current account deficit, please remain seated, fasten your seatbelts, put your seats in the upright position, and sit back.

This commentary was published in Radikal daily on 20.12.2013