Turkey Will Continue to Surprise

Here we go again. The U.S. Federal Reserve (Fed) is giving ambiguous signals regarding the timing of the expected monetary tightening. Investors controlling funds in emerging markets are beginning to feel increasingly nervous and rumors about an imminent financial crisis in Turkey have once again entered the conversation. It gives the feeling of deja vu yet again as major international media outlets such as the Financial Times, Forbes, Foreign Affairs and Wall Street Journal systematically publish articles about the “collapse of Turkey’s bubble economy,” “the end of Turkey’s dreams of becoming a global power,” “the end of Erdoğan’s political dreams” and “the rise and demise of Turkey’s trading state.” The sharpness of the perceptive change of Turkey’s economic prospects is truly striking given the rather limited scope of change in the country’s macroeconomic fundamentals when it was hailed as an economic success story. Yet, the truth of the matter is the bulk of the deterioration narrative marketed by international media outlets is overly exaggerated and far from the economic realities on the ground. It is true that contracting demand in some of Turkey’s key export markets such as the EU, Russia and Iraq is exerting a negative impact on overall export performance, global trends toward a stronger dollar constitute pressure on the Turkish lira and the anticipated reduction in inflation did not materialize due to the impact of harsh weather conditions on food prices. But these factors do not constitute enough reason to justify the ongoing crisis-mongering that surrounds analyses within and outside Turkey, most of which carry open or implied elements of political opposition against the international standing of President Recep Tayyip Erdoğan and the Justice and Development Party (AK Party) government. Compared to some of the BRICS countries, especially Brazil, which fighting against rising inflation and interest rates amid sluggish growth, and South Africa, not to mention Russia heading into a wall, as well as emerging markets such as Argentina, Turkey is doing comparatively rather well. Prime Minister Ahmet Davutoğlu is currently in New York with his top ministers responsible for macroeconomic management, namely Deputy Prime Minister Ali Babacan and Finance Minister Mehmet Şimşek, for the second stop of his roadshow after London to invite international investors to Turkey, and he was received very warmly at Goldman Sachs headquarters by the investment community, which keeps faith in the future of Turkey.

As known, there is a global trend through which global liquidity is going home as the U.S. economy continues to give improving signals in terms of employment, industrial capacity use and growth parameters. Yet at the same time, the Eurozone, Japan and most emerging markets are struggling with sluggish growth and declining global demand. As an emerging economy Turkey has been placed at the heart of these global challenges over the course of the last two years, but somehow achieved to maintain its growth impetus in the post-crisis period. Turkey’s peculiar problems has a lot to do with the more than anticipated impact of macro-prudential measures that were implemented to control domestic consumption and credit expansion following the crisis-exit period. These measures, accompanied by an overly tight monetary policy and slowing influx of foreign funds led to a period of relative cooling off and reduced growth.

What Turkey needs at this critical moment in international markets is to achieve a timely transition to a framework of production-driven macroeconomic so that both the modernization of agricultural production as well as manufacturing sectors toward high-technology products can be accelerated as engines of sustainable growth. This is more like an issue of changing policy priorities and points of emphasis that could be realized through gradual transformation, rather than a sharp systemic transition that could occur only through a systemic crisis. Turkey will continue to surprise the endemic pessimists and