For instance, in a recent IMF document, it is noted that in G-20 advanced economies, recovery is becoming more self-sustained. Growth, however, remains too low to substantially reduce output gaps and still-high unemployment, reflecting the continuing impact of pre-crisis imbalances (e.g., housing) and crisis-related damage (e.g., financial systems and fiscal positions). Therefore the message here is to continue supporting pro-growth measures in advanced economies.
The tone and the dose of the warning is quite different for emerging market economies. It says that in G-20 emerging economies, growth is expected to remain robust, in part reflecting limited damage from the crisis. Unlike the developed economies, the challenge in emerging market economies is to avoid overheating in the face of closing output gaps and higher capital flows.
Turkey is among the countries where growth is robust in 2010 and some earlier data on economic activities show that it is still quite strong as of the first quarter of 2011. Recent data, particularly the producer price index, show that sooner or later inflationary pressure is coming. Moreover, Turkey's “overheating problem” has become more visible from recently rising current account data. Therefore, these are two clear messages for two important risk factors in the near future.
At this point, according to the IMF perspective, the policy response should be twofold. First, rely on a combination of fiscal consolidation and higher interest rates to maintain output at potential. Second, use macro-prudential tools, including, where appropriate, capital controls, to avoid increases in systemic risk stemming from inflows. The exchange rate appreciation that may result is part of the desirable adjustment, the increase in real income, and should not be resisted.
This policy prescription such as a higher interest rate adjustment is not well accepted in Turkey. Having considered Turkey's recent experiences during 2006-2008, and her current comparably unique position, Turkey wants to normalize growth momentum to a more sustainable level from almost 9 percent real growth as of 2010 to somewhere not less than 6 percent in 2011, in my view. Therefore, in the process of controlling the current account deficit (CAD) as well as consumer inflation, growth and employment creation should not be harmed.
In that regard, rather than rising interest rates, policy makers such as the Central Bank of Turkey developed an alternative policy response. Higher interest rates are avoided because: (i) the negative repercussions on growth would be more than desirable; (ii) still inflationary expectations are not so serious to react to with interest rate hikes; (iii) higher interest rates would trigger even further portfolio investment in Turkey, which would result in even more CAD and more risk in the future.
Because of these reasons, at the first stage, with the aim of reducing liquidity volume in the market by decreasing the amount of total credits, the central bank increased currency ratio for deposits according the date of maturity and currency combinations. Now before taking additional steps, we are waiting to see if these measures are working sufficiently. If not, presumably after the general elections in June, additional measures on the fiscal front, such as imposing additional tax on some consumption oriented import goods, would come on the agenda.
What is o0bvious here is that Turkey consciously avoids any kind of “shock therapy” or cold measures against these risky developments. As the CAD is being successfully financed and inflation is not the major concern as of today, an evolutionary, step-by-step approach should be seen as a more market-friendly approach.
Despite this fact, Turkey's “overheating” problem is being excessively abused in an irresponsible manner by some experts in the foreign as well as domestic media. This perspective has already been turned into a campaign against Turkey. In that regard, it is argued that Turkey is approaching another financial crisis similar to the ones in 1994 and 2001. In the table provided, I have summarized major macroeconomic indicators before the crisis of 1994, 2001 and today. The message from the given data is that soon before these crises, not only the CAD per se, but almost all macro economic data was dramatic. To put simply, the current situation simply is not comparable to the past experiences of Turkey. In other words, in Turkey a crisis should be seen as the result of entire systemic deficiencies rather that the result of a single macroeconomic parameter such as the CAD.
In my view, current measures will be supported by some additional measures soon after the election and the CAD will be controlled at a more acceptable or sustainable level, the new government will focus on structural reforms to normalize all these problems in the longer term.
