The Turkish economy’s ability to resist US-led recessionary waves

* View by Ibrahim OZTURK

Turkey has recently made several attempts, including expansionary monetary and fiscal measures, to buffer itself against the effects of the subprime meltdown in the US, but it seems that the results of these measures are still inconclusive.

Even worse, increasing numbers of indicators have shown that the credit market crunch has the potential to dominate also in the real (non-financial) economy, so that severe recessionary pressures may arise in the US as well as in other major industrialized countries.

Today I want to discuss the ability of Turkey to resist or avoid these recessionary impacts. There is no question that Turkey became a part of the world economy after several reform measures that were taken after the crisis of 2001. Turkey has benefited tremendously from the positive international situation in the process of eliminating the deficiencies arising from the last crisis and improving the basic macroeconomic outlook.

Today the picture is changing and, this time, against Turkey. To understand the ability of the Turkish economy to resist recent recessionary pressures, the following two tables, as supplied by the Central Bank of Turkey, can be helpful.

We can compare the recent situation with the data for 2000, for which the economic situation at the time resulted in a severe crisis. Obviously the current account deficit and short-term external debt of Turkish companies -- $40 billion of which is attributable to the banking and real sectors -- is quite significant, yet not alarming. Turkey's export-import coverage ratio is much better as compared to 2000. It should be noted that rising foreign exchange rates as well as declining oil and other major commodity prices parallel to that of recessionary trends will increase the competitiveness of the Turkish manufacturing industry. Therefore, trade and the current account deficit will improve. The same process will help inflationary pressures recede significantly. Therefore, we can expect that Turkey will meet the consumer price index (CPI) inflation target of 4 percent more easily in 2008.

Second, export coverage of short-term external debt and debt service has improved quite significantly and will improve even more in the coming period. Third, the ability of central bank reserves to cover short-term debt, debt service, current account deficit and imports and to close the finance gap is also better than it was in 2000.

Finally, we must add two important elements here. The most important insurance against global turbulence and the current account deficit is Turkey's flexible exchange rate regime, which has started reacting now in a positive direction to reduce some recent side effects of Turkey's excessive global vulnerability. Second, if Turkey can continue its reform schedule and create positive expectation on domestic-led growth in the coming few years, foreign interest in the Turkish economy will continue.

The last message is that Turkey has the ability to turn this crisis into an opportunity provided that the political climate allows it to do so.