22 Şubat 2014 Cumartesi

Where I agree and disagree with Babacan

No way out without reforms
Last Monday, in an interview on TV, Deputy Prime Minister Ali Babacan made some important assessments of the hot issues that Turkey is trying to handle.These assessments are worth discussing since they are rather realistic and not pure political propaganda. I saw five major topics in Babacan's assessments: the policies of the Central Bank of Turkey, the state of unemployment and its future in terms of economic growth, the sustainability of the current account deficit (CAD) and, finally, the need for reforms.
Minister Babacan started by saying there is no crisis; thus there is no need for a comprehensive economic package. So we can now stop fretting ourselves by trying to guess what kind of measures may come with the famous “Plan B and Plan C” announced by Prime Minister Recep Tayyip Erdoğan just after the central bank decided to increase interest rates. Erdoğan said last month that an "out of the ordinary" economic package alternative to interest rate hikes could be announced. He added that work on a Plan B or Plan C may be announced in the coming days or weeks.
We have heard nothing but rumors circulating about these mysterious alternative plans so far.
Regarding monetary policy, Babacan reiterated his support for the unconventional policies of the central bank. He argued that the interest rate corridor instrument (multiple and varying interest rates) had prevented inflows of large quantities of short-term capital. As a result, he said, the impact of the US Federal Reserve's policy and the Dec. 17 corruption scandal on outflows had been mitigated, since there was no great quantity of hot money in Turkey. I agree. This point is often missed in the debate about the central bank's monetary policy. That said, I do not agree with Mr. Babacan when he says that the central bank was not wrong in delaying its interest rate decision. Indeed, the Monetary Policy Committee (MPK) refused to move on the issue during its meeting in January, but it was obliged to increase interest rates a few days later in an extraordinary meeting because investors had started to sell their Turkish Lira denominated assets in a panic, causing a dangerous shift in the exchange rate.
Mr. Babacan argued that this panic was due to the serious turmoil that had occurred in Argentina and Russia two or three days after the MPK's meeting. This argument is hardly convincing. Personally, I think the political pressure on the central bank was so stifling that the MPK was not courageous enough to increase interest rates earlier, hoping that this omission would not affect investors' behavior. It was a great mistake.
However, I fully agree with Babacan's assessment of the evolution of unemployment. He was right in pointing out that the rate of unemployment had been on an upward path, but that during the last two months of 2013 it leveled off. He added, “It is too early to make a comment, but if we see our growth in gross domestic product [GDP] below 4 percent, then the jobless rates could be relatively higher.” So the critical issue is expected growth this year. On this point, the deputy prime minister was rather cautious. After saying that growth performance will depend both on domestic demand and exports, he indicated that it is still too early to make a projection on domestic demand, but expectations on exports to the EU market are promising. Unlike Mr. Babacan, I am almost certain that domestic demand, particularly demand for investment and durable consumer goods in the first quarter, will be very weak. But Babacan is right to expect that there will be more exports to the EU. Last year, these exports grew for the first time since the eruption of the economic crisis. This year, the EU economy seems to be in better shape. So we can count on exports to the EU market.
I wrote in a previous column that my growth-rate forecast for this year is around 2.5 percent. Since then, many other predictions have been published. Even the most optimistic ones do not predict a rate over 3 percent. If these turn out to be correct, the Justice and Development Party (AK Party) will be faced with increasing unemployment and stagnating well-being. The deputy prime minister is certainly aware of this challenge. As he pointed out, the Turkish economy is unable to have 4-5 percent growth without lowering its CAD to a sustainable level. Mr. Babacan thinks that this level might be 4-5 percent, but the deficit must be even lower in the long run. Let me point out that the CAD/GDP ratio is actually over 7 percent.
Admittedly, the challenge is a difficult one. This may be the reason why Babacan insisted once again on economic reforms during his interview. The fact that he insisted on reforms shows great virtue in these days of political madness.

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