Central bank throws the ball to government
The soft landing strategy is working well in Turkey.
Nobody was expecting to have a current account deficit (CAD) below $60 billion at the beginning of this year. The government planned to have a CAD of around $64 billion in the mid-term. But as of October, it was $55 billion, and if the same trend continues for the next two months, the year-end deficit will be around $50 billion. This is still 7 percent of Turkey's gross domestic product (GDP), but enormous progress has been made and the central bank's policies appear to be working.

The bank successfully differentiates local currency reserves from the incoming foreign exchange reserves and minimizes the US dollar inflow. This policy limits domestic loan growth, and giving the opportunity to banks to keep their reserves in gold and foreign currency helps them drain excess US dollars from the market. This supports the financial stability of the market and limits the appreciation of the Turkish lira as well. Financial stability is evident, and after the policies worked successfully and mitigated the vulnerabilities, the Turkish economy was upgraded to investment level, which was a long overdue rating upgrade, by Fitch Ratings

The most positive surprise is on the foreign trade side. While exports are increasing 15 percent on average a year, imports declined by 3 percent, and these positive results narrow the trade deficit and CAD considerably. While the share of trade with European markets shrank to 39.2 percent -- an 8 percent decline in the first 10 months -- trade with non-European economies increased 34 percent. The result is of course a lower trade deficit, diversified export markets and a lower than expected CAD. Net exports is the unique variable that keeps Turkish growth above the 3 percent level and is the most promising growth share in GDP. We cannot ignore the effect of the booming gold trade in exports.

On the negative side, however, the budget deficit has widened more than expected. It is time for the government to reconsider its budgetary policies and find ways to increase state revenue and decrease spending. The main driving force behind the record level of budget deficit is the 18 percent increase in expenditure. Due to declining imports, import tax revenue remained the same, and this is the main source of income loss. A good kind of loss, but eventually the government can lose revenue due to lower imports. Another revenue-cutting factor is limiting loan growth. This also lowers indirect tax revenue growth and puts a drain on revenues. Revenue from indirect tax increased only 6 percent in the first 10 months of the year. However, spending increased by 18 percent in the same period.

The structural reforms that I referred to in my previous columns now are evident. There is only one way out. Either you have to lower spending, which will be another factor to contribute to limiting growth, or increase taxes. Turkish Minister of Finance Mehmet Şimşek is looking for ways to increase tax income without at the same time putting too much burden on the middle class. In the end, it is hard to limit government spending in an election year -- 2014 -- and in a period of sluggish growth. It's time for the government to reform the taxation system and take the structural reforms more seriously.

Although it pushed the limits last year, inflation appears to be on the right track thanks to the slowing economic growth and relatively more favorable energy prices. However, unemployment will be the next pain in the neck. Up to 3 or 4 percent growth in employment isn't enough to keep the unemployment rate at the 8 percent level. We can expect to see higher unemployment levels in the coming months, and this will not help the economy at all.

The winners at the end of the day are foreign investors in Turkey. While the İstanbul Stock Exchange (İMKB) is breaking records, around 65 percent of the shares traded on the stock exchange are owned by foreign investors. However, domestic portfolios are mostly of Treasury bills. While we are seeing astonishing profit on the stock exchange, the Treasury bills are yielding relatively lower profits. Domestic investors have to learn the way to make money. This will drive a better savings in the long run, which is the only cure for minimizing the CAD.

HAKAN TAŞÇI (Cihan/Today's Zaman) CİHAN
Last Modified: 2012-11-21 10:00:02
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