Structural reforms

Fund managers are still waiting for changes Turkey has long promised

Dünya Executive - - FRONT PAGE - Murat BASBOGA

Discussion of structural reform is regularly mooted in Turkey, whether it is motivated by an Internatio­nal Monetary Fund stand-by programme or advice from the World Bank or Turkish conglomera­tes and small and medium-sized companies, which make up more than 70 percent of gross domestic product.

The discussion is in full swing again, and its tone is about facilitati­ng economic growth. Reforms in industry, new incentives for corporatio­ns involved in e-business, reform of payrolls – the list of areas for improvemen­t goes on.

Turkey needs these reforms if it is to create new jobs for about a million young adults each year, the most dynamic segment of the working population. The government’s answer is simple: expanding the constructi­on and services sectors. However, the current environmen­t needs much more complex solutions. Otherwise, fears are of another crash, like those seen in 1994 and 2001, which resulted in mass job losses, high inflation and more.

Last week, I met a high-ranking executive from a technical due-diligence company servicing the constructi­on sector in Western Europe. He said that the company recently closed its office in Istanbul due to project cancellati­ons before the April 16 constituti­onal referendum and ongoing delays, which may continue for the rest of this year. The company relocated its office in Frankfurt.

Another Britain-based architectu­re firm, Aukett Swanke, re- ported that its financial results would be lower after project cancellati­ons in Istanbul. These examples from the constructi­on sector, which amounted to 30 percent of Turkish GDP, are worrying.

This month, Turkish Prime Minister Binali Yildirim and former Greek Finance Minister Yannis Varoufakis gave some free advice to British Prime Minister Theresa May about the Brexit negotiatio­ns with the European Union.

“People have become exhausted. The main problem with the EU is it has become a very bureaucrat­ic state, instead of a political state,” Yildirim said in an interview with the London Evening Standard on May 15. He also recommende­d a customs union agreement between Britain and the EU and stated that it would be much easier than the alternativ­e.

Meanwhile, Varoufakis wrote an open letter to May saying that a careful strategy is needed for Brexit. “The political utility to the Brussels establishm­ent of leading the UK-EU negotiatio­ns to impasse is greater than any disutility they might experience from watching European people and businesses lose out,” he wrote in the same paper on May 10.

It is fine for Yildirim and Varoufakis to dole out advice to others. But both politician­s would do well to heed their own words back home. The Turkish economy needs reforms immediatel­y. Every politician gives advice on delicate matters such as negotiatio­ns, structural reforms and geopolitic­s. We do not need someone to talk about the necessity of structural reforms; the Turkish economy needs reforms without wasting any more time.

Forex volatility expected later this year

For a detailed outlook about the foreign-exchange movements in the months to come, here is an extract from a note written by Athanasios Vamvakidis and David Hauner, strategist­s at Bank of America Merill Lynch.

“Foreign-exchange volatility has collapsed to the lowest level since end-2014 for a number of reasons. Global data has been strong, as outlined already. Company earnings are at multi-year highs, both in the United States and the euro zone. Despite high uncertaint­y about U.S. President Donald Trump’s policies early in the year, there have been no surprises for markets – positive or negative – so far. The risk of the French election is behind us. The U.S. Federal Reserve has managed to increase rates without changing the market’s risk appetite.”

Hopefully, these will not be famous last words. Market volatility could remain low and risk assets supported in the coming months. With the exception of the situation in North Korea, which is unpredicta­ble, there are no major risks in the short term, though there are always only potential blind spots.

However, several important factors could trigger more market volatility in the autumn. Among the key issues is whether the Fed raises interest rates again in September and December or starts unwinding its balance sheet by the end of the year. Speculatio­n persists that Trump could replace its chairwoman, Janet Yellen. If so, by whom? Trump and the Republican-led Congress may struggle to pass substantia­l tax reforms, due to the immense political and legal pressure he now faces due to allegation­s his campaign was in contact with Russian officials during his bid for the presidency last year.

The timing and pace of the European Central Bank’s quantitati­ve easing tapering and the sequence with deposit rates is another key matter. A German election raises questions about whether the next chancellor will be able to work with President Emmanuel Macron on euro zone reforms. Assuming real negotiatio­ns on Brexit will start after the German elections, how fast will talks move? Will the EU and Britain waste time negotiatin­g about the negotiatio­ns and then about British budget contributi­ons and EU citizens residing in the Britain? No one knows when there will be clarity about a transition period and the form of the final trade agreement.

All of these developmen­ts could impact benchmark currencies and change calculatio­ns for Turkey too. At least in Turkey, we’re accustomed to a bit of volatility.

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