Turkish Economy amid Global Financial Turmoil

Finally, it has happened. The reluctant comparisons and bashful voices at the very beginning of the crisis have turned out to be screams and outcries. Almost every newspaper lists the similarities between current global crisis and the Great Depression in 1929. Almost every single news starts with the phrase of “the worst financial crisis since the Great Depression” in order to show us how terrible the situation is.

In fact, it does not seem very likely for this crisis to be a duplication of Great Depression. As The Economist writes “... America’s economy may be just entering recession; between 1929 and 1933 it shrank by more than a quarter. Some economists fear that unemployment, now a touch over 6%, might reach 10%; in 1933 it was about 25%, and many of those in work were on short time and short pay. Americans are not banging at the doors of banks demanding their money, nor queuing around the block for soup and bread.[1]” As a matter of fact, nobody knows exactly what will happen in the future; just, we all want to hope for the recovery.

Another important and somehow mysterious point regarding the crisis is its possible effects on the emerging markets. “How tough this financial turmoil might hit the shores of emerging markets?” has turned out to be one of the most popular questions nowadays. In this regard, as an emerging country, Turkey may be an illuminating case study.

I. Turkish Economy amid Global Financial Turmoil

Turkish economy is very familiar with financial crises and economic fluctuations. Just within two decades, she has experienced four major crises in addition to the minor jolts. However, the 2001 financial crisis was a milestone for Turkish economy in the sense that the GDP shrank by 7.4 per cent in real terms, inflation increased to 68.53 per cent, and the currency lost 51 per cent of its value vis-à-vis other major currencies. The banking sector came very close to the destruction, and many banks went into bankruptcy. “The biggest economic crisis of the Republican era” paved the way for Turkey to re-structure her economy and an ambitious recovery period, which was underpinned by different segments of the society, took off.

In retrospect, it can be said that 2001 financial crisis was almost “home made”. Over the last six years, Turkey has succeeded to transform most of its minuses into plusses, and tried hard to make her home tidy. However, the mortgage crisis in the US in the mid-2007 created new “externalities” for Turkish economy. This time, the nature of the crisis was different because it was not a domestic product, and there occurred a systemic risk on Turkey, like other emerging countries.

II. How Resilient is the Turkish Economy?

Turkish economy has both strengths and weaknesses. In order to see the complete picture one should concentrate on these two dimensions simultaneously. Below, I shall evaluate strengths and weaknesses to create a “balanced” balance sheet.

Strengths:

One of the most important strengths of the Turkish economy is its solid financial system. As I mentioned above, during the recovery period after 2001, Turkish Banking System has improved significantly. The regulatory institutions like Banking Regulation and Supervision Agency (hereafter, BRSA) has become the initiator of the new banking regulations and it promoted the prudential supervision mechanisms. At the end, Turkish Banks positively improved their capital basis, and developed new risk management techniques. As it can be seen from BRSA’s figure below, the CAR, for Turkish Banks is about 17 percent as of 20th of October. This is satisfactorily a high ratio once it is compared with the European banks. In addition, CAR for Turkish Banks is quite above the Basel standards (it is 8 per cent).

More importantly, Turkish banks have almost no open position. The bad memories of 2001 crisis made the Banking managers more cautious against foreign debt and domestic revenue discrepancy.

Second strength of the Turkish economy is the relatively strong position of the CBRT. Now, CBRT holds official FX reserves about 73 billion dollar (as of October 17, 2008). This relatively high volume creates confidence among the market participants, and strengthens the weapons of the CBRT to intervene the currency markets to avoid the excessive volatility.
The third strength of the Turkish economy is the foreign and domestic confidence. Turkey, thanks to the latest diplomatic maneuvers, has become a more visible country not only in Europe but also in the eyes of Middle Eastern investors. The portfolio of Turkish exporters has diversified and Turkish businessmen sign contacts almost all around the world. This situation may create alternative possibilities for Turkish financial markets as well.

Weaknesses:

One of the most important weaknesses of Turkish economy is the open position in the reel sector. According to the Central Bank of the Republic of Turkey, there is an open position amounted to approximately 60 billion dollar, and the reverse movements in the USD/TRY parity may put these firms into payment difficulties. Since these firms have dollar denominated debts and TRY denominated revenues, the appreciation of dollar vis-à-vis TRY may have the potential to create liquidity shortages. If we recognize the liquidity problems all around the developed economies, and take care of the fact that even the banks in the developed countries hesitate while financing each other, it will become obvious that rolling over their debts may somehow be a problematic issue.

The second important issue is the attitudes of Turkish government. At the first stages of the latest wave of the crisis, Turkish government acted as if there would be no such a thing as crisis. However after the USD/TRY parity gained value about 35 per cent within a couple of weeks, the first steps of policy measures announced by the government. The “overvalued” Turkish lira was an important concern for the Turkish exporters; however, even they criticized the immediate jump of the parity. The public pressure from business environments forced the government to think on new measures. As a result, the Ministry of Finance started to work on some tax relief proposals in order to alleviate the burden on the producers. The CBRT, also, started to provide 50 million amounted dollars daily in order to avoid the excess volatility in exchange rates. In the following days, Turkish government may announce new measures to improve the conditions of SMEs’ accessibility to credit markets.

The third important issue is about the future of the Turkish economy in general. In this regard, two major problems seem to come to the forefront:

1. Current Account Problem

Current account deficit has always been one of the headaches of Turkish economy. Especially after 2001 period, the current account deficit/GDP ratio increased steadily and reached to 5.7 per cent at the end of 2007. Financing this relatively high ratio was sustained by intense privatization applications and portfolio inflows. Since there is a retreat in global liquidity, it may become a problematic issue to create new sources. However, it is of vital importance not to overlook one point here. Since Turkey is an oil importer country, the ascendance in oil prices has contributed significantly to the current account deficit. As known, given that the oil prices turned direction into negative; it becomes apt for us to expect a decrease in the CAD/GDP ratio. In order to understand “energy effect”, it is possible to draw the following figure. In the following figure, the dashed line shows the current account deficit/ GDP ratio if the energy prices are kept constant at 2002 prices[2]. The other line shows the same ratio with taking the current energy prices into consideration. If the decrease in oil prices continues, the CAD pressure on Turkish economy seems to alleviate.

2. Trade Problem

Another important point for the Turkish economy over the next months may be the slowdown in export growth rates. Since Turkey is a country that sells mostly to the Western markets, a possible leftwards shift of the demand curve in the European markets due to the financial crisis, may affect Turkish exporters negatively. According to the latest trade statistics, almost half of Turkey’s exports are directed towards the European Union countries. Given that the EU is on the brink of recession and it is hard to be optimistic about the future, the concerns have a ground. However, there are also attempts to diversify the trade structure in Turkey. Irrefutable achievements also materialized already. For example, Turkey’s five biggest markets now take 37 per cent of exports, down from 50 per cent in 2002[3].

III. Positives and Negatives: Which one surpasses?

As I tried to demonstrate Turkish economy has both strengths and weaknesses. Yet, in the final analysis, which one surpasses? Actually, the correct answer should be “it depends!” The final balance will ultimately depend on international and domestic factors.

The international side of the story is very dependent on the next phases of the crisis. If the fluctuations and bank failures continue in the Western markets, and if these economies plunged into a long lasting recession as some argue, Turkey will be affected inescapably. As a matter of fact, the emerging markets as well as Turkey have not too many instruments to reverse this situation.

The domestic side of the story is much more important for Turkey. If the government recognizes the gravity of the situation and succeeds to create a solid political base albeit the fractious nature of Turkish politics, there are still enough rooms for Turkey to escape from the external waves at least to some extent. Moreover, if it becomes possible to reach at a compromise with the IMF and to accelerate the negotiations with the EU[4], Turkey may consolidate the confidence of the foreign investors as well as domestic actors. With the help of these two “external anchors”, it is possible for Turkish economy to turn the crisis into a kind of chance.

References

[1] The Economist, “Echoes of the Depression: 1929 and all That”, October 4th-10th 2008, p.76
[2] This figure is drawn according to the calculations of the CBRT. See: “Financial Stability Report”, May 2008, Volume: 6, p.8. Accessable at http://www.tcmb.gov.tr/
[3] The Economist, “Turkey’s Economy: In need of an Anchor”, October 25th-31th 2008, p. 38.
[4] The anchor role of the EU seems to be more efficient than the IMF if one takes care of the latest developments. Hence, the improvement of the Turkish-EU relations would be more beneficial for Turkey. Simultaneously, Turkey should not deny sitting on the table with the IMF. Since Turkish economy is stronger than the past, Turkey may have a chance to reach at a consensus with the IMF under much better conditions than the previous one.

Mustafa Kutlay

mkutlay@usak.org.tr

USAK EU Studies Desk,

http://www.usak.org.tr/

www.turkishweekly.net

www.usakgundem.com

2008 İlerleme Raporu’na Göre Türkiye Ekonomisi

Avrupa Komisyonu 5 Kasım 2008 tarihinde yayınladığı İlerleme Raporu’nda Türkiye’nin geçtiğimiz bir yıl içerisinde AB müktesebatına ne kadar yaklaştığını, neleri başarıp neleri başaramadığını mercek altına aldı. Genel perspektiften bakıldığında AB-Türkiye ilişkileri açısından durgun bir yıl olarak değerlendirebileceğimiz bu dönemde iç politikada gündemin terör, finansal kriz ve yaklaşan yerel seçimler nedeni ile yoğun olması AB sürecinin sekteye uğramasına sebep olmuştur. İç politikaya ek olarak Kıbrıs Sorunu nedeni ile de müzakereler fiili olarak neredeyse durma noktasına gelmiştir. Bütün bu şartlar altında ve ABD seçim sonuçları ile aynı tarihe gelmesinin de etkisi ile İlerleme Raporu Türkiye’de pek ses getirememiştir.

Genel olarak bakıldığında İlerleme Raporu’nda Türkiye’nin insan hakları ve azınlıklar konularında, iç politika alanında ve politik reformların hayata geçirilmesi noktasında yeterli ilerlemeyi sergileyemediği dile getirilirken; ekonomi, dış politika ve iyi komşuluk ilişkileri alanlarında ise başarılı bir performans izlediği belirtiliyor.

Türkiye’deki ekonomik gelişmelere de değinilen raporda, Türk ekonomisi ile ilgili güçlü ve zayıf yönler analiz ediliyor. Avrupa Komisyonu’nun Türkiye ekonomisini artıları ve eksileri ile nasıl değerlendirdiğini iki başlık altında incelemek mümkündür.

Artılar

Türkiye ekonomisi ile ilgili değerlendirmelere GSYİH’deki büyüme rakamları ile başlayan rapor, 2007 yılında büyümenin bir önceki yıla göre %6,9’dan %4,6’ya gerilediği tespitini yapıyor. Bu dönemde büyümedeki yavaşlamanın temel sebebinin tarım sektöründeki küçülme ve toplam talepte azalmadan kaynaklandığı dile getiriliyor. Ayrıca Merkez Bankası’nın uyguladığı sıkı para politikasının da iç talepteki daralmada temel etken olduğunun altı çiziliyor.

2008 yılı ile büyüme rakamlarının daha da gerilediğini (ilk yarı için %4,2), bu gerilemede küresel koşulların ve iç siyasi atmosferin daha etkin olduğunu vurgulayan rapor, her şeye rağmen Türkiye ekonomisinin eskiye nazaran çok daha iyi durumda olduğunu ve daha sağlam temellere oturduğunu dile getiriyor.

Türkiye’nin mali performansını tatmin edici olarak değerlendiren raporda, mali arenada hesap verebilirlik, şeffaflık, etkinlik konusunda önemli başarıların elde edildiği vurgulanıyor. Yine bu minvalde olmak üzere hükümetin açıkladığı beş yıllık orta vadeli mali çerçeve planı takdirle karşılanıyor. Ancak küresel şartların da dikkate alınması gerektiğini düşünen Komisyon “daha sağlam finansal çıpalara” gereksinim olduğunu öne sürüyor. Esasında bu şekilde, IMF ile anlaşılması gerektiğini üstü kapalı bir şekilde ima ediyor.

Özelleştirme ve fiyat liberalleştirmeleri ile ilgili de Türkiye’nin önemli başarılar elde ettiğinin altı çiziliyor ve özel sektörün GSYİH içindeki payının %89 seviyesinde olduğu bilgisi veriliyor. Finansal sektör ile ilgili bir takım istatistiklere de değinilen raporda sektörün sıkı gözetim ve kontrol altında olduğu dile getirilerek oldukça dayanıklı olmasının Türkiye için bir avantaj olduğuna vurgu yapılıyor.

Türkiye’nin istihdam yapısı ile ilgili de analizlerin yapıldığı çalışmada çalışan nüfusun %26,5’inin tarımda, %48’inin hizmet sektöründe, %20’sinin sanayide ve %6’sının inşaat sektöründe çalıştığına değinilerek tarımdan hizmet sektörüne geçişin yaşandığı tespitinde bulunuluyor.

Eksiler

Raporda Türkiye ekonomisi ile ilgili bir takım sıkıntılar da dile getiriliyor. İlk olarak Türkiye’nin 2008 yılı ilk yarısında %6,3 seviyesine ulaşan cari açığına dikkat çekiliyor ve küresel likidite şartlarında gerileme olması münasebetiyle yaşanması muhtemel finansman sıkıntıları hatırlatılıyor. Özel sektörün açık pozisyonunun önemli meblağlara ulaştığının, bunun da “potansiyel bir risk” olduğunun altı çiziliyor. Ayrıca raporda cari açığın finansmanının kalitesi konusunda da gerileme olduğu belirtiliyor. Bu bağlamda açığın daha çok borçla finanse edilmeye başlandığı dile getiriliyor. Bu noktada 2008 boyunca Doğrudan Yabancı Yatırımların iç ve dış nedenlerden dolayı gerilediğini belirtmekte fayda var.

Raporda Türkiye ekonomisi ile ilgili eleştirilen bir diğer nokta ise işsizlik olarak dikkatleri çekiyor. İşsizliğin %10 ila %11 arasında seyrettiği belirtiliyor ve bu rakamın genç nüfus içerisinde %20’lere ulaştığı vurgulanıyor. Birçok insanın tarım sektöründe aile işçisi olarak çalıştığını ve durumun da işsizlik rakamlarını azalttığını belirten Komisyon, iş gücü piyasasının yeniden yapılanması, kadınların iş gücüne dâhil edilmesi ve vasıf uyuşmazlığının giderilmesini temel politika önerileri olarak ön plana çıkarıyor.
Ayrıca raporda fiyat istikrarının da geçtiğimiz dönemde ciddi biçimde zayıfladığı ancak bunun büyük oranda enerji ve gıda fiyatlarındaki artıştan kaynaklanan “dışsal faktörler” neticesinde olduğu dile getiriliyor.
Şirket kurma ve kapama prosedürlerinde iyileşme olmasına rağmen yasal mevzuatın halen daha ciddi engeller oluşturduğu dile getiriliyor ve bu konuda ilerleme kaydedilmesi gerektiğine değiniliyor.

Rapordaki tüm artı ve eksiler bir arada değerlendirildiğinde sonuç olarak denilebilir ki, Komisyon ticaret önündeki teknik engeller, ithal izinleri, fikri mülkiyet hakları, yolsuzlukla mücadele ve devlet yardımları gibi konular açısından yeterli gelişmeyi sağlayamadığı için Türkiye’yi eleştirmekle birlikte, küresel krize ve iç siyasi atmosfere rağmen Türkiye’nin “işleyen bir piyasa ekonomisine” sahip olduğu mesajını iletmiştir.

Mustafa Kutlay

mkutlay@usak.org.tr

USAK AB Araştırmaları Merkezi

http://www.usak.org.tr/

www.turkishweekly.net

www.usakgundem.com

Financial Liberalization and Crisis in the Age of Globalization

“Periods of high international capital mobility have repeatedly produced international banking crises, not only famously as they did in the 1990s, but historically.”

Reinhart and Rogoff[1]

Globalization has turned out to be one of the most controversial topics of our time. It is almost impossible to conclude a debate without touching upon at least one aspect of globalization. Moreover, it is not an easy job to make a comprehensive and adequate definition of it that leads to overselling of this term. Notwithstanding the definitional ambiguity, there is more or less consensus on what economic globalization is: It briefly refers to the abolishment of customs and trade barriers, the surge in technological developments and knowledge, the widespread liberalization and integration of financial markets, and the relatively movements in labour markets.

Arguably, the most dynamic and unstable part of economic globalization is the financial side of the story. The recent financial crises have clearly demonstrated this fact, and proved that the deterioration in the financial system has the potential to plunge the overall economy into a crisis, per se. For instance, the perversion of the financial globalization had caused huge economic meltdown in Mexico and South Korea even these countries have solid macroeconomic fundamentals at the very beginning of the crises. For example, before the crisis in Mexico, the inflation fell from 130% in 1987 to 7% by 1994; economy was growing at an annual rate of 4.4%; while the government budget was -0.7%. The only problem was the current account deficit with 7.2% of GDP[2]. The uncontrolled and very fast liberalization of the Mexican financial system has paved the way to full-fledged financial crisis. These and the similar other crises brought up one important point into the agenda of world economy: What are the risks associated with capital market liberalization, and in which ways:
Basic pillars of risk accompanied with capital market liberalization

1. The surge in risks due to asymmetric information

The neo-classical economic theory, which is the main theory that the International Financial Institutions (IFIs) such as IMF and WB rely on, assumes the information in the markets is perfect in the sense that each side of the financial transaction have the same and, moreover, full information about the nature of the transaction in question. Since “all-available information” is used in markets, the funds will move to those with the best investment opportunities, which mean there will not be a misallocation of resources. However, asymmetric information theory, one of the most important contributions to the financial literature, explains why this may not be the case in reality. Asymmetric information is a situation in which one party to a transaction has more or less undistorted information than the other side. For instance, a possible loan seeker knows more on his/her possibility to make monthly re-payments than the possible lender. According to asymmetric information two problems avoid efficient allocation of resources: Adverse selection and moral hazard problems.

Adverse selection is the problem exists before the transaction occurs. This problem occurs in the marketplace due to the potential borrowers those are the most likely ones to create bad credits risks are selected to be lend. Since they seek out actively for the loan more than the others, because they need the money more than the latter, they have the highest possibility to take the loan, which in turn leads to credit risks and the misallocation of capital.
Moral hazard is the problem exists after the transaction occurs. In financial markets this problem refers to the risk that the borrower might involve in the activities that are immoral from the lender’s viewpoint since they decrease the re-payment possibility of the loan. Again, due to the asymmetric information associated with the financial markets it is not possible for the lender to know the end of his/her money fully.

As mentioned above the feverish adherents of capital market liberalization ignore the potential of adverse selection and moral hazard problems to impede the well-functioning of financial markets[3]. In fact, the recent financial crises[4] and the already sub-prime mortgage crisis can be seen as the result of asymmetric information. If the information asymmetries are the fact of financial markets, it implies that there always exists the possibility of misallocation of capital; thereby there is room for regulatory institutions and financial controls. It also implies that capital market liberalization is not a panacea for market inefficiencies; on the contrary it may be another impediment to market efficiency and economic growth.

2. Off-balance sheet activities

The second pillar of the risk associated with the capital market liberalization came into being due to the widespread use of off-balance sheet activities. As known, the traditional sources of profit for the banks are the difference between the interest rates they pay to their depositors and charge to their borrowers. However within the two decades mainly due to the capital market liberalization, the very competitive nature of this traditional banking segment urge banks to seek out non-traditional ways to exploit extraordinary profit opportunities. This leads to “financial innovation”, and one most common type of financial innovation is the “off-balance sheet activities” that the banks engaged. For example, non-interest income derived from off-balance sheet activities increased from 7% of the total income of the banks in 1980 to more than 45% today. Briefly off-balance sheet activities refer to the trading of financial instruments and generating income from fees and loan sales. These are the activities that contribute to the profitability of the bank but do not recorded in the balance sheet of the banks. However, the off-balance sheet activities not only enable high profits, but expose the banks to extra risks since it becomes difficult to measure the actual level of the risk. With the wind of capital market liberalization and with the help of lax governmental regulations all around the world, the financial innovation has forced the boundaries of risk taking and increase the adverse selection and moral hazard problems. Once the Collateralized Debt Obligations (CDOs), the financial derivatives, the junk bonds and the swaps are added to the already complex nature of the banking system, it becomes really difficult for regulators to assess the risk levels of the financial system. These risky instruments, when accompanied with the information asymmetries, carry the potential to create a “domino effect” as it is the case in the latest mortgage crisis.

3. The difficulties in establishing economic governance mechanisms

What we have today is a really integrated and thereby complicated financial market. This often leads to instability and chaos. As explained above the information asymmetries increase with the capital account liberalization and the conventional IFIs are not only inadequate in dealing with financial fluctuations, but also suffer from the lack of legitimacy. This situation underlines the deadly need for “new economic governance” mechanisms. As a matter of fact, establishing these kinds of institutions is big hurdle due to the huge differences between emerging and developed countries. As Rodrik and Subramanian emphasize, institutional reform process is of great difficulty due to diversified interests and benefits of nations[5]. Moreover, “one-size fits all” types of institutions are not the appropriate ones to challenge the risks directed by capital market liberalization.

Looking Ahead

It can, plausibly, be said that the capital market liberalization has created three important unexpected/unwanted consequences. First, it increased the asymmetric information problems in the marketplace, which in turn caused instability[6] and impeded economic growth[7]. Second, it contributed to the excessive risk taking by financial institutions. Thirdly, it created a deep “economic governance” problem due to inadequate prudential supervision systems. Especially this one, establishing the appropriate risk assessment systems, stands as one of the major challenges in front of the world economy in the age of globalization.

By Mustafa Kutlay & Muzaffer Vatansever, April 21, 2008.

________

[1] Reinhart, Carmen M, and Kenneth S. Rogoff, 2008, “This Time is Different: A Panoramic View of Eight Centuries of Financial Crises,” National Bureau of Economic Research, Working Paper No. 13882.
[2] Mishkin F. S, “The Next Great Globalization,” Princeton University Press, 2006, pp: 76–77.
[3] Stiglitz J. E, 2004, “Capital-Market Liberalization, Globalization, and the IMF,” Oxford Rewiev of Economic Policy, vol. 20 no. 1
[4] Mishkin F. S, 1999, “Lessons from the Asian Financial Crisis,” National Bureau of Economic Research, Working Paper No. 7102.
[5] Rodrik D, Subramanian A, 2008, “Why Did Financial Globalization Disappoint?”, http://ksghome.harvard.edu/~drodrik/Why_Did_FG_Disappoint_March_24_2008.pdf
[6] Actually, capital market Liberalization has contributed to the rise of consumption volatility as Kose, Prasad, and Terrones demonstrated, which is clearly against the neo-classical theory. See: Kose, M. Ayhan, Eswar S. Prasad, and MarcoE. Terrones, “Growth and Volatility in an Era of Globalization,” IMF Staff Papers, 52, Special Issue, September 2005.
[7] Stiglitz J. E, 2004, “Capital-Market Liberalization, Globalization, and the IMF,” Oxford Rewiev of Economic Policy, vol. 20 no. 1, p. 59.