Economists are discussing the capacity of emerging market economies to avoid the crisis that has erupted in the core industrial countries. Despite these discussions, what is obvious is that if the current uncontrolled meltdown continues for a longer period of time, there is no way for the peripheral countries to isolate themselves. This is applies to Turkey, too.
In fact, Turkey's dependence on industrialized countries is quite deep in terms of its export markets and the financing of its constantly rising current account deficit due to the savings-investment gap.
Therefore, slowing export markets, declining foreign direct investment inflows and squeezed long-term credit facilities would seriously hamper Turkey's growth performance, which would, in turn, lower income, increase unemployment and worsen income inequality even further. Moreover, the deepening credit crunch or worsening credit rationing -- a selective process in the credit-lending process -- and a significant devaluation would lead to serious fallout among firms in both finance and the real sectors.
However, in the midst of such big potential troubles, Turkey has started feeling some positive side effects from the current crisis and from its own achievements in foreign trade strategy over the last five years.
One recent piece of good news comes on the inflationary front. Inflation has been considered one of the two serious fragility indicators for Turkey, the other one being the rising current account deficit.
To start with the first, Turkey's consumer price index (CPI) and producer price index (PPI) have started declining in the last couple of months.
The rises in both CPI and PPI were below expectations. According to figures released by the Turkish Statistics Institute (TurkStat), at the end of September, year-on-year inflation was running at 11.13 percent in CPI and 12.49 percent in PPI.
Obviously, in the future performance of the CPI trends in core price inflation, a subcategory of the PPI, will be decisive.
After a longer period of steep increase in the PPI since July 2007 that forced the CPI to rise, as well, the rising tendency lost its momentum this July and the gap between the CPI and PPI almost disappeared by September.
Lower agricultural and industrial prices (down by 1.51 percent and 0.75 percent, respectively) were instrumental in the September improvement in the PPI. A drop of 0.81 percent occurred in the manufacturing sector, despite a surge of 0.56 in electricity, gas and water prices. Price cuts were also seen in the food industry (0.47 percent) and coke and oil refining (4.54 percent). A sharp fall of 8.44 percent was reported for the basic metal industry. Sub-sectors that saw price increases in September included textiles (0.51 percent) and land vehicles (0.90 percent). Another noteworthy development was the 7.73 percent jump in clothing prices in September, due to the seasonal shift.
Following all these developments, the year-on-year PPI reached 13.94 percent in the industrial sector, 12.68 percent in manufacturing, 6.57 percent in the agricultural sector and 26 percent in utilities.
Current positive trends on the inflationary front may enable the Turkish Central Bank to start cautious rate cuts in the coming months, depending on the situation of the world financial crisis.
Any possible rate cut would improve expectations by motivating domestic growth performance, which should be seen as a critical task to prevent damage to Turkey's attractiveness and contain negative repercussions from the global turmoil.
We will now shift our emphasis to the second fragility indicator, the current account deficit. Despite coming difficulties in the financing of this deficit, the good news is that there have not yet been any signs of weakening in Turkey's export performance and that Turkey's import expenditures are set to decline due to declining prices in commodities such as energy, oil, food and metals. Therefore, the gap between export and import volumes will be narrowed and pressure on the current account deficit will likely be lowered in the coming period.
In fact, with a 36.4 percent rise, exports reached $12.1 billion in September, bringing cumulative sales in the first nine months of the year to $102.4 billion, a growth of 35.4 percent over the same period last year. As of end the end of September, the annual exports were expected to hit $132.7 billion. This would correspond to a 32.6 percent rise compared to the same period last year.
The importance of the rising surge in exports is that Turkey's export market in Europe, in which Turkey's dependence has traditionally been around 65 percent, is now seriously contracting. However, with a new strategy Turkey has given a special emphasis on its neighbors and other nearby countries. African and Caucasian countries have been given special emphasis recently, and this is now yielding fresh results. In fact, Turkey's dependence on European markets has declined to around 50 percent.
For instance, Turkey's top export markets in September were Germany, the United Arab Emirates, Britain, Italy, Russia, France, the US, Romania, Spain and Netherlands. This trend suggests that, in addition to its well-diversified export goods, Turkey has also started diversifying its export markets.
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