Economic fragility and the crisis expectation of big business in Turkey

In early May, the Standard and Poor (S&P) rating agency downgraded the sovereign rating of Turkey from “positive” to “stable.” The news of S&P’s action came as a disturbing move in certain political circles in the country and had a distorting effect on the positive economic atmosphere established by the AKP through its partisan press. Starting with the prime minister, AKP’s economic experts, as well as the important economic organizations of Turkey, were quick to make public statements criticizing the agency’s position. “If you downgrade the sovereign rating of Turkey, we don’t buy it and respond by simply saying ‘I do not recognize you as a credit rating institution,'” declared Prime Minister Recep Tayyip Erdogan. Rifat Hisarcikoglu, the President of TOBB (the largest economic non-governmental organization in Turkey), responded similarly by saying that they did not take the announcement of S&P seriously. “These kinds of developments will not impact the expectations and perception of investors,” said †mit Boyner, the president of TUSIAD, an umbrella organization for large capital groups and business establishments in Turkey.

The reactions of the ruling political party went so far as to address the entire international rating community with the threat of tabling the possibility of establishing an alternative credit rating institution as a national entity. Currently, there exist 76 rating institutions in the world, some 60 of which are active in emerging markets, and five of which that focus not on sovereign debt but on corporate issues. Any serious investor in the global economy clearly knows that no government can take decisions based on its own rating reports. Stefan Wagstyl, the emerging markets editor of Financial Times, stated that he approves and holds appropriate the points raised in the report on Turkey by S&P. “Current account deficit, which was equal to 10 percent of GDP in 2011, is so excessive that no rating institution can ignore it, even a Turkish one,” he said, emphasizing the futility of any attempt to establish a national rating institution.

Turkish economy is one which was struck by the impact of the 2008 crisis that emerged in the USA. Besides the fact that Turkish economy is still a typical emerging market economy, there also exist many significant fragilities which may pave the way for an economical crisis. In this case, a possible crisis could originate from the exchange rate and interest rate fluctuations by both the general public and the business world. Turkey is a country which recognizes and admits a crisis situation as the volatility in exchange rates and interest rates reach far beyond historically peak levels. Increased unemployment, economic growth without generating new jobs, impaired distribution of income and the increased poverty of masses are not considered as critical indicators by the prevailing political establishment including its supporters in the media and other public circles.

AKP has been successfully staging a perception management operation since it assumed power in 2002. Especially following the emergence of the crisis in 2008, as the exchange rates and interest rates exhibited a rather stable trend due to non-trade and non-financial injections of foreign currency from the neighboring markets, the Prime Minister declared that the international crisis would “pass by the Turkish economy tangentially, if any.” From the point of view of an institution which is responsible for providing investors with correct information, S&P, with its latest declaration, burst AKP’s bubble of its dream economy displaying the economic fragilities in Turkey. The main reason for AKP to attack this institution so severely is nothing short of stating that “the king is naked.”

As we look closely, we see that the problems are not so easy to ignore. The most important fragility lies with the problem of current account deficit. In an environment created by a wave of unstable growth into which the economy is driven, Turkey is giving the impression of a fragile economy which has been sending out negative signals since 2011 in terms of certain criteria such as funding the current account deficit with short-term capital inflows, expressed in the relatively high ratio of short-term foreign debts/central bank’s international reserves and the net exchange position of economy. According to data provided by Turkish Central Bank, net foreign exchange gap of the companies in real economy increased to $27 billion, while it reached up to a total of $102 billion with a fivefold increase in the period between 2003 and 2011. The inconsistency between foreign exchange assets and foreign exchange liabilities of companies in real economy is rapidly increasing and the companies’ sector face with an extremely serious exchange rate risk. The fact that the real economy balances become so fragile indicates that a very strong real sector crisis, which may drag the economy into a recession in case of a monetary crisis, is only a matter of time.

While political power along with the employer organizations such as TOBB and T†USIAD are busy with accusing S&P which emphasizes the worsening situation and fragilities, Turkish business world is aware that these fragilities will set the scene for crisis. A survey conducted with the contribution of Economists’ Platform, Aksoy Ara_tõrma and Bloomberg HT in March 2012 revealed interesting results related to the problem of current accounts deficit. _stanbul Chamber of Industry conducted a questionnaire on 1000 companies in frame of this research. According to findings, among the largest companies of the business world, the percentage of those who consider the high deficit of current accounts as a problem is 81,6 percent.

Although the current accounts deficit is considered chronic, those who think the government is successful at managing the current account deficit is quite low. Most probably due to the past experience and to the artificially high value of the Turkish currency, more than 50 percent of the manufacturers still prefer borrowing in foreign currency. The companies anticipate that the current account deficit will be a problem for the national economy this year, as well. Given the first findings in the light of the discussions following the decision of S&P, the business world is aware of the threat and considers very seriously the possibility of an emerging crisis.

Why and for whom then all this trouble deployed by AKP? Will the global investors who strongly perceive the fragility act based upon the advice from the political power in Turkey or upon the market rules? Since the answer to all these questions is obvious, the political power shows an excessive effort not to create a perception of an economic crisis that would curtail its real political agenda.

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