It was an opinion recently maintained by some economists and adopted by us that the stability programs applied after the crisis in 2001 enhanced the staying power of economy. We had the opportunity to test the correctness of this opinion during the fluctuation that took place in the markets during May and June. We think that the economy passed such test sound and safe. Because, we overcame a process, which caused 3 great crises during the last 20 years, with very few damages.
When we calculate the monthly hot money flows for the period between January 1992 and June 2006 based on the definition of the Central Bank, we see that the outgoing monetary amount for our country in May was not less than the outgoing amount during the major three crises. Moreover, the hot money move that took place in May 2006 quite exceeds the hot money move of the period January & February 1994, when the crisis of the 1994 was triggered. However, the rise in the exchange rates and interests created by this capital loss was not as high as during the times of crises. Also, it seems that the inflation rates shall not rise as high as it used to in the past. Although the economy used to face deep crises after the capital losses, it seems that growth shall not suffer considerable damage this time. And these point out to the fact that Turkey’s economy has grown solid as compared to past.
How did the economy get solid?
The most important contribution to a more solid economy in Turkey was creation of discipline in public finances. This discipline provided kept the public debts and debt stock levels below the dangerous limits and also contributed to the decline of the interest and inflation rates. It was impossible for the Central Bank to fight this struggle against high inflation rates had it not been for the discipline provided in public finances.
It is beyond doubt that the fact that the proportion of the budget deficit to national income, which was around the 16.5% just five years ago, fell to 1.7% also enhanced the solidity of the economy. Also, the facts that the share of the interest payments in the budget, which rose as high as 51% in 2001, fell to 32% last year and that the proportion of the net debt stock of the public to the national income, which amounted to 90% in 2001, regressed to 55% last year are among the factors enhancing the stay power of economy. Decrease in the budget deficit, interest payments and debt burden released the Treasury of the obligation to get into debt at any price. Thus, this time it was not needed to issue bonds with super interests to re-attract the lost capital, as was the case in 1994 and 2001.
Influence of the financial solidity
Elimination of the weakness in financial sector, which caused the crisis in 2001, also enhanced the staying power of Turkey’s economy against the crises. After the financing deficits of the public banks were met and the problematic private banks were excluded from the system, the finance sector was relieved from becoming on the brink of a crisis with each fluctuation in the financial markets.
The financial solidity index, a new index that is recently calculated by the Central Bank, clearly shows the improvement in the financial sector since the crisis in 2001. This index, which was below 100 before the crisis in 2001, is currently over 116. The rise in the financial solidity index, which is calculated duly by using the rations to reflect the risks and fragilities of the banking sector, points out to the fact that the financial sector becomes more powerful.
The importance of political stability
The enhancement of solidity of Turkey’s economy is not just due to the economic developments but also due to the political developments. The most important development that took place in this period was that the time of the coalitions, which lasted over 10 years, was over and a single-party government was created. By the single-party government, the period of long negotiation among the coalition partners for each single decision was over and the concern over the laws that need to be issued as to being passed by the parliament diminished. Thus it became more likely for the government to calm down the markets by the promises it makes in times of difficulties in economy.
The legal independence conferred to Central Bank after the crisis in 2001 is also among the factors enhancing the solidity of the economy in our opinion. Because, such independence enhances the dominance of the Central Bank on the financial markets and enables it to respond urgently to any failures that may arise. Of course, legal independence should also be observable in practice. The fact that the former management of the Central Bank did not make a concession as to the independence prevented many fluctuation dangers before. And, the concern that the new management may not duly claim independence was among the reasons for the fluctuation experienced in May and June.
We are not “a fortress” yet
Although our economy was solidified as compared to the past years, we are not in a state that can be described as “a fortress” yet. Our economy can still resist the fluctuations of the same scale as the fluctuations in May and June. However, there is a possibility that we can experience fluctuations that may exceed the barriers built against fluctuations during the last five years. This is why we have to raise the barriers higher.
The first way to do this is to diminish the dependence of the economy on imports and thus to prevent the dependence of the growth on current deficit, which requires the government to backup industries manufacturing raw materials and semi-processed goods by a long-term plan and program. The fact that Turkey is becoming a popular country for refinery investments is a hopeful sign in this aspect.
As 500 thousand young people join the labor market every year and as it takes a minimum growth rate of 6% in order to employ them, we do not have an option to slow down the growth in order to limit the current deficit. Because, in such a case, limiting the current deficit would enhance the solidity of the economy; while increase in unemployment rates would act in just the opposite manner.
Decrease In External Deficit Unlikely
The first half of the year closed with no considerable changes in terms of external balance. The expectation that the economy would slow down following the rise in the exchange and interest rates had resulted in the expectation of an improvement in external deficit in turn; however, this hope is lost after the latest data published. The results of the survey of expectations applied by the Central Bank show that the expectations as to the year-end current deficit, which dropped to USD 25.5 billion in June as compared to USD 27.5 billion in May, escalated again in two months and reached to USD 26.5 billion.
In fact, an escalation was observed in export performance during the fluctuation in the financial markets. As a period of 2 or 3 months is needed for the rise in exchange rates to be reflected upon the new export connections, the impact of the exchange rates on this increase in exports is not clear. However, it is a fact that the exports were accelerated in May and June. It is also notable that there is a slight slowing down in the imports in June.
These developments in foreign trade had positive reflections on the current accounts balance in June and a regression took place in the monthly current deficit. However, as the monthly current deficit was still above the level of the past year, the rise in the annual current deficit could not be stopped. The annual current deficit reached USD 28.7 billion, which is a new record.
But the temporary data for July are not very positive. The monthly foreign trade deficit, which regressed to USD 4.2 billion in June, seems to approach to USD 5 billion for July. The start of the regression of the exchange rates again and the outlook to the effect that the economy will not slow down as was foreseen before do not make it hopeful for the following months.