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    The timing of the fiscal rule is quite correct

    Güven Sak, PhD13 May 2010 - Okunma Sayısı: 1085


    A spectre is haunting Europe: the spectre of the debt crisis. Despite the trillion dollar bail-out package which is not known how to make operational and the functions of which have still not been understood, there is no change in the Western front. The only operational result of the trillion dollar bail out package is the fact that the European Central Bank has started to make some moves in order to buy the Greek government debt securities (GDS) in secondary markets. This also counts, but there still hasn't been a structural attempt towards the public finances of problematic countries. Under these circumstances, the 'Fiscal Rule Law' draft that State Minister and Deputy Prime Minister Ali Babacan explained via a press meeting the other day is a right step taken to limit the effects of the crisis growing in Europe on Turkey. The timing of this step is quite correct, too. For the first time in a long time, Turkey seems to be shaking off the political inertia that we've become accustomed to. The first point to emphasize is this: The Fiscal Rule Law draft finally being on the agenda is actually more important than its content. This is the first point to be underlined. For the first time, a step is being taken without any need to say 'come on, already'. Of course we are going to discuss the details and the content, in this concept, after the draft has been formed. Let's tackle with the other side of this matter for today, shall we? Why is Fiscal Rule Law draft important and why is it important exactly right now? Those of you who wonder are welcome to join me down the article.

    Apparently, the debt crisis spectre will continue to mess the economic activity up, in the West front. In such an environment, it is not possible for Turkey to stay out of it for three reasons. First the fact that there isn't any problem concerning the sustainability of the GDS stock today, doesn't mean that there won't be tomorrow. Turkey's public finance record isn't clean whatsoever. In a world where the GDS stocks are closely inspected, increasing the credibility based on public finance system is, just as distinguished Minister has pointed out the other day, like buying a disaster insurance. It is good. Why is it good? Just wait and see, in a short while, a number of new indicators will emerge concerning the size of the countries' GDS stocks. A country that looks well in the rankings concerning the GDS stock/national income rate today, will not necessarily rank the same when the share of the debt stock in the banking system portfolio, is concerned. It would be better to be prepared and stay focused on this matter. This, is the first point.

    The second is the fact that, Europe's problem will decrease the rate of growth over there, and this is not good for Turkey's export performance. Why so? One way or another, our country's main export market is the EU countries. In 2008 and 2009, the share of EU-15 countries in our total export was 39%, while that of EU-27 countries was 48%. The grand share continues to belong to the EU. There is also a structural reason why Turkey sells its goods mostly to the EU: Our export support system is designed mainly with the EU countries in mind. The fundamentals of the system are constructed considering the markets around, which are ordered with no political risk and where easy collection can be enjoyed. We've come as far as we can, without this being amended, saying 'new markets need to be sought'. This is the second channel by which the spectre of the debt crisis in Europe will affect our country. The momentum of the recovery process slowing down for this reason, will abolish the strength of a number of companies, to carry on.

    Third channel is that of exchange rate. It appears that the Euro will remain weak in medium term. This being the case, the pace of increase of the TL revenues of the companies that export to Europe will slow down. However, their costs in TL terms are in no decrease.  If you wonder, you can find out by just having a look at the input costs, starting from energy costs. Costs increase substantially. It is obvious that this outcome has the potential of having a negative effect on the recovery performance of the corporate sector. This, is the third channel.

    So, won't any good come out of this matter? It will. When the share of the Euro-denominated financial assets hold in international portfolios is concerned, Turkey might actually be a centre of attraction to fund inflows as much as Indonesia and Korea. In this context, the Fiscal Rule regulation is an instrument which might encourage fund inflows.

    When these direct and indirect effects are concerned, the Fiscal Rule Law draft is highly beneficial in terms of limiting the possible negative effect that results from the first channel and turning the crisis over there, into an opportunity. Its timing is also appropriate. However, one thing should be kept in mind for both in offsetting the negative effects and realising the positive effects: The Fiscal Rule regulation is necessary and obligatory for strengthening the financial recovery process; however, it is not enough.

    What else is needed? We will discuss that later on.


    This commentary was published on Referans daily on 13.05.2010