Turkey’s on my mind. Let me sum up my point – that the outlook for the Turkish economy hangs very much in the balance – from the following news excerpts.
From the Hürriyet Daily News and Economic Review on February 8 :
the Legislation for the [fiscal] rule, which will limit the size of the budget deficit as a proportion of gross domestic product, will be submitted to Parliament in the next few months, Babacan said. The government has announced a formula setting the framework for annual budget preparations. Elements in the formula, such as the target level of the deficit and variables that define the speed at which the country will reach its target for the debt stock, have not been set.
From BusinessWeek, via Bloomberg, on February 19:
S&P lifted the country’s sovereign credit rating to BB with a positive outlook, two levels below investment grade, from BB-, according to an e-mailed statement today. Reductions in government debt and a “solid” banking system were cited as two of the reasons for lifting the rating. “The upgrade reflects our view of the Turkish government’s improving economic policy flexibility as a result of its strong track record in steadily reducing the debt burden,” said S&P analysts including Frank Gill in London.
And then from the Hürriyet Daily News and Economic Review on March 1:
A constitutional reform package is at the center of Turkey’s ruling party’s attention after the recent crisis between the judiciary and the government. With a long list of to-do items, the ruling party is likely to seek consensus from opposition parties first before presenting its suggestions to Parliament and may have to barter for progress
The AKP (majority party) made a 180-degree turn from tackling economic reform in a country with twin deficits to potentially very contentious constitutional reform. (IHS Global Insight, subscription required, forecasts Turkey’s current account deficit to be 3.3% of GDP in 2010 and the fiscal deficit to be 5.1% of GDP). Constitutional reform is difficult and necessary, given that the current version was imposed after the 1980 military coup. However, it does put the economic recovery at risk.
Confidence, and thus the recovery, is on the line. Currently, Turkey has the highest misery index across 16 O.E.C.D. countries selected by yours truly.
Turkey’s misery index was 18.6% in November 2009: 13.1% unemployment plus 5.5% inflation. Inflation has since risen to 8.2% in January, so the misery index likely worsened. (It wouldn’t be too crazy to claim that Turkey’s misery index is setting world records, but I did not construct indexes for the world.)
Rising misery drags consumer confidence, and thus demand, with near-certainty. I don’t think that it’s a stretch to expect recent political volatility to drag the consumer confidence even further.
Misery and waning consumer confidence has already driven a wedge between demand and supply (industrial productions), suggesting that recent gains in the production sector are most likely unsustainable.
But business confidence is also on the line. Emre Deliveli (please see his blog for updates on Turkey) points me to the survey results of the American Business Forum in Turkey. An excerpt from the 2009 report:
65% of US company executives are concerned about receiving fair treatment when bidding on government contracts and find commercial courts to be unresponsive to the needs of business. The transparency and efficiency of decision-making in the public sector remains a key concern as in previous years. High electricity costs are a negative factor, and personal and corporate income taxes are considered to be complicated and not competitive with other countries. There are also concerns regarding credit costs and financing opportunities. Only 30% of executives find that there is adequate protection of intellectual property rights, including patents, trademarks and copyrights.
It’s obvious that reform is necessary. But whether or not constitutional reform leads to productive microeconomic reform is a serious question, in my view. One thing is for certain: if constitutional reform supplants economic reform over the near-term, the economic prospects are less sanguine. In fact, the medium-term fiscal metrics are at risk as well.