Yesterday Deputy Prime Minister Ali Babacan announced the medium term program for 2010-2012 period with a press meeting. Moreover, revised estimates for 2009 were also announced. Let me first put this: Macroeconomic targets and estimates seems to be achieved under two conditions: if a new global shock is not encountered and if we can fulfill the measures and reforms listed.

Assumptions on the rest of the world are naturally based on forecasts of international institutions: global growth is assumed to increase moderately as of the last quarter of 2009. In parallel with this, it is estimated that commodity prices will rise significantly in 2010. Moreover, majority of developed countries is expected to introduce raises in interest rates and taxes at a certain phase of economic recovery. 2009 contraction forecast is revised to 6 percent. It is foreseen that economy will grow by 3.5 in 2010 and by 4 and 5 percent in 2011 and 2012, respectively. In brief, it is expected that potential growth rate will be reached moderately. Estimations for 2009 and 2010 are realistic while I have doubts about the 2011 forecasts.

Mr. Babacan, in response to a question, stated that main driving force of 2010 growth will be the solid structure of the banking sector. With the recovery of the budget deficit, banks are expected to extend credits more easily. In fact, this is the first target among the listed fundamental targets of the program. But how will this target be met? As the program suggests, budget deficit expected to be 6.6 percent of the 2009 GDP will go down constantly to 3.2 percent of the 2010 GDP. Primary surplus will be secured as of 2011. This way, ratio of public debt to national income, which will increase by 8 points to 47.3 percent in 2009 compared to the same period in the previous year, will first rise slightly and then fall down to 2009 level.

I believe that the factor that will ensure the mentioned rate of growth will be the 'base effect' that I already have discussed here:   Assume that you produced 100 units in the first year (2008). In the second year you face a 20 percent fall in production to 80 units. If, in the third year (2010), you produce 83 units; growth rate will be 3.8%! However, you still produce 17 percent less than you produced in 2008. Turkey's growth in 2010 will be in this pattern. Rest of the world will recover slightly. Foreign credit channels will leak slightly.

But, what will happen in 2011? Here, the importance of the policies we are to implement steps in. I believe that the medium term program makes two assumptions in this context. First, in 2011, rest of the world will recover to a higher extent. Second, the tightening Turkey is to launch in particular in fiscal policy area will raise the confidence in the economy and reduce real interest rates. We will access foreign funds more easily thanks to solid banking sector on the one hand and to the improved confidence climate on the other hand. Current account deficit forecasts already follow the projections that there will arise a certain easing in provision of foreign funds. Ratio of current account deficit to GDP increases gradually compared to 2009 and reaches 3.3 percent in 2011.

This is the first vulnerable point of the program. Given that the global financial system will not recover in 2010 and since developed countries will most probably initiate interest rate raises before the second half of 20010, can we finance the current account deficit? In order to achieve this, we should first secure the fiscal discipline promised. In addition, we have to put into effect some of the structural reforms listed in the program. Top priority must be tackling the informal economy and improving the qualifications of the labor force. To decide to what extent these can be accomplished, we have to know some details.

The second vulnerable point is that the term of the program coincides with the general elections. I would like to call your attention to unemployment forecasts. Unemployment rate, estimated to reach 14.8 percent in average in 2009, is foreseen to drop only by 0.4 percent in 2010. As global experience reveals, unemployment rates jump high during financial crisis; production level goes back to normal relatively more rapidly while it takes quite a long time for unemployment rate to go back to normal. The estimation therefore is in line with this experience. But, to what extent the politics can handle such a high level of unemployment in the dawn of general elections? We must keep in mind that in 2007, average rate of unemployment was 10.3 percent, so we are talking about a four-point rise.

It is possible to slow down such concerns: with the implementation of a medium term fiscal rule. Press meeting paid special attention to the considered fiscal rule. Moreover, it was emphasized that Germany recently introduced a constitutional change to strengthen the legal infrastructure of this arrangement.  I know that keen efforts are made in this area. However, year of implementation is announced to be 2011, which is quite late. And this constitutes the third vulnerable point of the medium term program.

This commentary was published in Radikal daily on 17.09.2009