Following the international credit crunch and subsequent meltdown of international markets, Turkey registered striking growth and the factors critical to this growth emerged.
These factors were discussed by Durmuş Yılmaz, the governor of the Turkish Central Bank, in his speech at the second International Conference on Economics -- held in the Turkish Republic of Northern Cyprus (KKTC) -- last week and organized by the Turkish Economic Association.
The full version of Mr. Yılmaz’s speech, which covered recent developments in the industrial and emerging market economies, can be found on the official website of the Turkish Central Bank.
However, I will briefly summarize his thoughts regarding Turkey’s economy. There are two reasons for my considerably long citation of Mr. Yılmaz’s speech. The first is to understand the central bank’s future perspective on the economy in the absence of fiscal rule, which was surprisingly postponed to 2012, and second, to assess the future of exchange rates that have been causing a big debate between the central bank and exporters.
After a respectable recovery in global economic activity during 2009, it seems that the global economy has entered another period of uncertainty. According to Yılmaz, growth outlook in the post-crisis period is likely to be determined by three factors.
“Fiscal sustainability is the most obvious factor. The crisis has prompted large government interventions, both to restore confidence in the financial system and to contain the fallout of the crisis on economic activity. A looming danger threatening the future of the global economy is a sudden deterioration of investor confidence over fiscal sustainability and a sharp rise in long-term interest rates. Therefore, it is imperative to put forward a credible medium-term framework to stabilize risk perceptions and to reinforce confidence in fiscal policies.”
“Having a healthy banking sector would be the second important factor that will lead to the decoupling of economies. Looking at developed countries, we see no signs of meaningful acceleration in bank credits. Toxic assets in balance sheets have not been cleaned up and underwritten yet, and many banks are likely to need new capital injections. Restoring the effectiveness of the credit mechanism is crucial in supporting the aggregate demand. As far as the banking system in Turkey is concerned, we are pleased to observe that it is regarded as one of the healthiest, most robust and profitable banking system among the emerging market economies.”
“Therefore, our banking system is well positioned to finance private sector recovery for a sustainable economic growth in the foreseeable future.”
“The last critical element of decoupling is a strong and sustainable rise in private demand. The prerequisites for a surge in private demand include meaningful improvement in employment prospects and low indebtedness of households. In comparison to typical business cycles, employment has been extraordinarily slow to recover. Continuing high unemployment rates due to rigidity in labor markets has the potential to depress private demand. Thus, labor market reforms should clearly be at the top of our priority list to raise our potential growth rate.”
“Households’ debt levels are the second crucial determinant of private demand. Households in many countries accumulated significant amount of debt during the pre-crisis period, which is beyond their ability to repay out of current income. For a meaningful correction in economic imbalances, savings rates have to stay elevated for many countries for years to come. In comparison, household indebtedness is quite low in Turkey. Therefore, a strong recovery in private consumption is not only probable but also sustainable in our economy.”
“It is the responsibility of the policy makers to ensure that we reach a better equilibrium consistent with price stability, fiscal sustainability, a healthy banking system and a competitive labor and product market. The Central Bank of Turkey will utilize all available policy tools to ensure price stability and financial stability to reach our ultimate goal, which is strong and sustainable growth.”
The critical message we get from this speech is that Turkey’s priority of preserving macroeconomic stability has not changed after the crisis. Therefore, rather than tackling the side effects of the economic paradigm -- such as the level of real exchange rates -- the bank takes care of the core elements, such as price and fiscal stability and the sustainability of long-term growth.
