Return of the ‘Turkish disease’

Growth in the first quarter was seen as surprising because of ever-worsening domestic as well as external political and economic situations. Not only is growth higher than expected but also subcategories of growth have shown that the sources of growth are also sound and robust.

Let's start with the production side. As has been observed, the growth rate of industry and manufacturing, which constitute 87 percent of general industry, has grown by 7 percent. In a similar way, demand side analysis also shows that not only is final private consumption expenditure (up by 7.7 percent) quite strong, but gross fixed capital formation (GFCF) has also exceeded expectations. GFCF in general rose by 9.5 percent, whereas private GFCF grew by 11.3 percent. Finally, the most important sub- category of private GFCF is machinery and equipment investment, which climbed by 15.3 percent. These figures show that investors still have positive expectations for the future. This also demonstrates that, unlike the pre-crisis period when the system was very fragile and vulnerable to external fluctuations and therefore was easily shaken by any small turbulence, the inherent mechanism of the recent economic paradigm is self-reinforcing and is now resisting the uncertainties and creating further opportunities.

However, it seems that systemic risks are accumulating and dominating the risk and uncertainties stemming from the very nature of the business itself. As a general principle, if there are systemic risks that are beyond control and prediction, an entrepreneur should not take this kind of external risk but rather should wait. Therefore, recent political affairs pertaining to the Justice and Development Party (AK Party) closure case and the Ergenekon terror organization are creating deep concerns in domestic as well as external markets. As a matter of fact, recently many foreigners, from official circles to businessmen to NGOs, have come forward and asked if there will be a serious interruption in the democratic reforms and economic changes. Unfortunately, having considered the history of coups and recent attempts, the scenario that they are asking about cannot be ruled out.

The second important risk is related to the cost of production in terms of energy, food and other commodity prices. To this we must add the contractionary monetary policy of the Central Bank of Turkey; therefore we would expect that economic activity will slow down by the second half of the year.

As a matter of fact, the repercussions of the global crisis on the economy have been greatly exacerbated by the domestic political climate. What I believe is that if there had not been any political uncertainty in Turkey, it would have been among the countries least affected by the global crisis as the Turkish economy still has many positive aspects.

Unfortunately, the negative effects of domestic affairs have started to overshadow the positive aspects. As Economy Minister Mehmet Şimşek noted the day before yesterday, the Turkish Treasury has thus far sustained a loss of YTL 20 billion due to Turkey's risk premium, as a result of which interest rates have increased by 5.5 percentage points to 22.5 percent since the closure case filed against the AK Party in March. Moreover, despite high interest rates, there has been significant capital outflow for the last couple of months. The total losses in the market capitalization of these companies have exceeded $80 billion. More has been lost with the huge outflows of foreign capital from financial markets, the slowdown in foreign direct investment (FDI) and a contraction in consumption, Şimşek added.

All these developments have shown quite convincingly that although the economy is being shaken by global developments such as soaring energy prices, a liquidity squeeze and the US sub-prime mortgage crisis, the political uncertainties on the domestic front are causing more damage to the Turkish economy.