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Economic policy mistakes (1)
Turkey has made critical economic policy mistakes over the last couple of years, which increased the risk perception. Let’s start from the moment and go back in time.
Turkey has made critical economic policy mistakes over the last couple of years, which unfortunately made the Turkish economy riskier. I want to discuss these mistakes in a series of commentaries. Let’s start from the moment and go back in time.
1) The drastic upwards trend in the exchange rate was replaced by a rather moderate upwards move at a higher exchange rate after the Central Bank (CB) decided during its interim meeting on Tuesday night to increase the policy rate (average funding cost) from 7.75 to 10 percent (weekly repurchase rate).
2) The CB’s interest rate decision in its stated meeting last Tuesday was “highly timid.” Before that meeting, the CB had faced certain political pressures from some government officials to not raise interest rates. The timid decision of the CB amid the policy rate standing below expected inflation, the risk of a further inflationary hike, and the apparent upwards trend in exchange rate gave way to the perception that the Bank is refraining from doing what needs to be done due to political pressures. This further accelerated perceived risks about Turkey. As a result, came a bubble-like hike in exchange rate against lira until Tuesday.
3) On 18 December, the Federal Reserve (FED) announced a well-anticipated decision for tapering. This reinforced the high risk perception about Turkey and the clear-cut upwards trend in exchange rate.
4) The corruption and bribery probe that was launched in 17 December and the subsequent political developments furthered the risk perception; the upwards trend in exchange rate turned into a daily and salient hike.
5) Following FED chair Bernanke’s statements, international financial reports started to discuss which countries would be hit the hardest by the FED’s decisions. A young economist introduced the “fragile five” concept which represents Brazil, Indonesia, South Africa, India, and Turkey. Turkey was on the list for its high foreign borrowing (foreign fund) requirement, that is, high current account deficit. Some other reports claimed that Turkey actually was one of the top two most fragile countries. As a result of these, risk perception against the mentioned countries increased; exchange and interest rates assumed upwards trends at intervals.
6) The Gezi resistance started in the late May 2013. The way the police was commanded to react made the world question the state of democracy in Turkey. Certain statements by government officials during the resistance exacerbated these concerns as well as the “us” versus “them” division.
7) On 22 May 2013, FED chair Bernanke declared in front of the US Congress that tapering might possibly be initiated in 2013. Tapering was announced to be followed by another operation to raise interest rates. This meant that countries which have high foreign fund requirements were going to have harder time doing so. In the context of past experiences and the economic theory, this implied gradual increases in exchange rate and later interest rate and a subsequent fall in growth rates for the mentioned countries.
8) In this process, Turkey’s foreign policy also came to be increasingly questioned. Turkey received a number of criticisms particularly from the US government and independent and influential think-tanks. The dose of criticism was remarkable in some.
The next time I will examine the economic policy decisions that were and were not made and discuss how they exacerbated Turkey’s riskiness.
This commentary was published in Radikal daily on 01.02.2014