Plots out, common sense in

The Turkish Statistics Institute (TurkStat) published, as usual on the 15th of each month, the labor market statistics for April. Unemployment might be the usual subject of this column, but there is neither good news nor bad news.
For hours to convince PM Erdoğan? Simply put, the unemployment rate has been stagnant at about 9.3 percent for months as a result of strong increases in the labor force as well as in employment. Considering the current low economic growth, this trend in the Turkish labor market is quite puzzling. I hope to come back to this puzzle in the coming weeks. The event of the week, I think, is the outcome of the Economic Coordination Board (EKK) meeting chaired by Prime Minister Erdoğan on Sunday evening in İstanbul and the subsequent announcement made by the central bank regarding its interest rate policy. Vice Prime Minister Ali Babacan, Economy Minister Zafer Çağlayan, Finance Minister Mehmet Şimşek, Development Minister Cevdet Yılmaz and some other Justice and Development (AK Party) managers participated in the Dolmabahçe meeting, discussing the state of the economy for four hours. According to Radikal newspaper, the EKK has not held a meeting since February. It was time. In the official statement made after the meeting, it was noted that capital outflows occurring in the last few weeks were due to US Federal Reserve Bank (Fed) Chairman Ben Bernanke's announcement related to the Fed's intention to end the current loose monetary policy in the near future and that this statement of intention caused an exodus, not only from the Turkish financial market that is largely integrated into global financial markets, but from other emerging markets as well. It was also pointed out in the EKK statement that institutions in charge of the economy are decisively taking necessary, timely and coordinated measures in order to mitigate the adverse effects of this exodus. Phrases like “the Turkish financial market that is largely integrated into global financial markets” and “decisively” must be underlined, but the critical point of the statement is definitely the disappearance of the discourse on an “international plot” and the infamous “interest rate lobby” conspirators. Last, but not least, the statement demonstrated once again the AK Party government's strong belief in fiscal discipline as elections approach. The day after the EKK meeting, the central bank announced its intention to enlarge its interest corridor at the next meeting of its Monetary Policy Committee (PPK), to be held on July 23. This corridor is set between 4.5 and 6.5 percent and the market interest rates of Treasury bonds have reached 9 percent and higher. In my column last Saturday, I wrote that this was an unsustainable position. Obviously, the central bank now plans to increase the upper limit of the corridor. Investors have already responded positively to this return to common sense in economic policy: The US dollar and the euro lost value against the Turkish lira, the two-year Treasury bond interest rate decreased to below 9 percent and the Istanbul Stock Market (İMKB) went up by almost 2 percentage points. Clearly, the flying capital is back. Taken together, highlighting the fact of the broad integration of the Turkish economy into the global economy, the fidelity to fiscal discipline confirmed by recent budget figures and the central bank announcement reflect a response to recent worries about the ability of the AK Party to properly manage a market economy open to capital flows coupled with a high current account deficit. In my recent articles I extensively discussed these worries that originated from the plot theories and blaming the “interest rate lobby.” This was not only a misperception and a wrong explanation of the recent “sudden stop” event, but also a dangerous drift in economic management threatening the fragile economic stability. Investors, local and foreign, needed to be relieved of their worries. The statement after the EKK meeting and the central bank announcement signal that it has, indeed, not become a prisoner to the talk of plots, as I have suggested in this column many times. So far, so good! But do not forget that this is just a first step made in the right direction. Now, the markets will wait and carefully scrutinize the steps taken toward implementation.