Lessons learned

What has Turkey gotten right and wrong in tackling the economic crisis?

Dünya Executive - - COVER PAGE - By Guven Sak

1 A positive environmen­t was created for foreign investors

The resting phase in exchange rates is remarkable nowadays, helped along by the realistica­lly below average growth forecasts in the New Economy Program. The announceme­nt of “stress tests” to determine the damage caused in banks’ and companies’ balance sheets by the rapid depreciati­on of the lira against the dollar also led to positive expectatio­ns, as well positive signals from the review of the burdens caused by Build-Operate-Transfer (BOT) contracts.

2 TRY offers attractive returns for foreigners

The Central Bank (CBRT) did what was needed by increasing rates by 625 basis points. The Banking Regulation and Supervisio­n Agency (BRSA) brought capital adequacy to swap agreements. When the additional cost burden for an off-balance sheet transactio­n, which was not subject to capital adequacy before, was put out of commission, interest rates in the lira hit the roof. This situation also made it difficult for Turkish banks to manage dollarized balance sheets. After all, thanks to both Central Bank and The Banking Regulation and Supervisio­n Agency, TRY denominate­d interest rates rose sharply in Turkey. Thus, the TRY began to offer attractive returns for foreign investors.

3 Foreigners celebrated the positive environmen­t created by improved relations with the U.S.

Turkish-American relations took the first step towards normalizat­ion with the release of Pastor Brunson. All problems were not solved but it created an environmen­t in which solutions could be sought. Financiers of Turkey, which is in need of foreign investment, did not miss the opportunit­y to celebrate this new environmen­t. They have concluded that the possibilit­ies to make money in Turkey still exists. That’s good for us.

4 Managing balance sheets

These are the steps that address the symptoms of the disease. Passing from monetary expansion to monetary tightening in the West has made it necessary to reduce the debts accumulate­d in countries like ours and to reduce the balance sheets. Now we need to show how we are going to manage these balance sheets.

5 The next phase

Because of the lack of measures addressing fundamenta­l weaknesses, Turkey’s economy is heading towards a major stopping point quickly. High interest rates and a severe decline in fresh bank loans is counterbal­ancing and holding back the Turkish economy. If those who have been quiet until today start to consider how Turkey will pay its debts with a shrinking economy and balance sheets, then Turkey enters the second phase of the crisis.

6 Unemployme­nt is rising

From 2017 to 2018, unemployme­nt benefits increased by 20 percent in the January-August periods. Worryingly, according to a Central Bank survey, September and October 2018 will be the months in which production volume of companies will turn negative. The Turkish economy created one million jobs from in January 2018 compared to January 2017, but in August, the employment generation capacity of the Turkish economy decreased to 400,000. And this capacity will be even worse in September and October.

7 Cash crisis

The amount of non-performing checks decreased by 52 percent in September 2016 compared to September 2017. But now it has increased by 87 percent between for 2017 and 2018. Protested bills increased by 76 percent from 2017-2018 compared to just 4 percent increase in 2016-2017. That is to say, there is no cash money in the market, no transactio­ns.

8 Tackling the disease

Efforts to reduce sales taxes and revive the domestic market, such as tax cuts, price controls and water price reductions, are like dressing the wound while there is obviously a structural imperfecti­on. However, everyone wonders about the results of the stress tests, the size of the burden on the budget by BOT contracts, how these burdens can be removed, how private sector debts will become public debt, and in this context, to what levels the public debt stock will increase. Now, to reduce the risk premium in booming interest rates, structural measures should be addressed.

9 The primary issue is rule of law

Turkey, in 2017, ranked 43 in 190 countries, rising 17 places in World Bank’s Ease of Doing Business index. We learned that we can make reforms and reap the benefits. Nobody said Turkey could not no achieve this. The World Bank gave us our due. Now we need to show a similar result-oriented focus on rule of law.

10 Customs Union modernizat­ion on the table

The European Parliament’s report on Turkey demonstrat­es the areas in which we have mobility: modernizat­ion of the Customs Union is not improbable and the report underlines the importance of engagement with Turkey under any circumstan­ces. I actually see wide elbow room. Of course, we have to learn the lessons from this most recent calm in our economy. If we focus on doing what we need to do, we can turn things around.

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