The question is what will we do if Turkey manages to create a new success story and thus the Turkish Lira tends to appreciate? In fact, let alone the creation of a new story, one even doubts the sustainability of the existing sloppy and short economic story that no one is willing to read. However, I am supposed to make comments on economics in this column; I am interested in the question above and I have been discussing his with colleagues for a while. Let me open the issue up. To do this, I have to go back to the program implemented after the 2001 crisis, conditions in the rest of the world back then as well as the outcomes of the implemented program.
The main fragility before the crisis was that the banking sector was at the slope and public budget had large deficits. State owned banks recorded high losses under duty losses item and in this parallel debts of the public sector tended to reach unsustainable levels. Banking sector restructuring operation launched after the crisis furthered the debt of the government. It was thought that the government at office on the road toward the crisis could not implement economic policies to overcome high level of debts after the crisis. As a result, interest rates reached unprecedented levels while borrowing maturities narrowed significantly. Through there was an IMF-supported program in effect, international financial institutions concluded in several reports that such situation is not sustainable.
No one was willing to invest due to the prevalent ambiguity and lack of confidence. Moreover, the fear of losing their jobs forced people to defer big expenses. Therefore, production decreased while unemployment elevated furthering the concerns about the sustainability of the process. The only way out of this vicious circle was tracing down the source of that circle and destroying it. In other words, through economic policies, it had to be put forth in a credible manner that public budget will be disciplined and the structure allowing large deteriorations in budget balance will be abolished. And then, of course, such policies should have been implemented without wasting time. This way it would be possible to improve confidence, considerably lower interest rates and realize deferred investment and consumption.
In the rest of the world, liquidity was becoming abundant and interest rates in developed countries dropped gradually. In such milieu, international risk appetite grew and emerging market economies, especially those having a 'story' enjoyed ample capital inflows. As long as the story was credible, capital flows turned into longer-term investment and direct investment.
Policies implemented after the 2001 crisis put a clear end to the vicious circle: concerns about unsustainability disappeared; interest rates and public debt dropped steeply. In such a milieu, Turkish Lira appreciated continuously. Such appreciation was a result of the mentioned story of success and the global liquidity that responded to the story. As the currency appreciated, exports of Turkey increased steeply.
This outcome, which seems 'weird' at first glance, was mainly a product of the will to compensate for the fall in international competitiveness driven by the appreciation of Lira by controlling other costs. In this process, productivity increased. In addition, as large economies grew above their potential, demand for Turkey's exports went up. What is more, thanks to abundant international liquidity, firms were able to finance investments and ensure productivity raises easily. In short, albeit it led to some certain problems, appreciation of lira was quite beneficial in terms of productivity and investments improving the level of technology. This way, exports of Turkey expanded rapidly.
Now, to repeat the above stated question; if Turkey gets an 'economic story' and as a result if the lira tends to appreciate, can we increase exports, too? Does the economy grow? My answer will be 'no'. In that case, we will need policies that will reduce the trend towards appreciation. I will open this up.
This commentary was published in Radikal daily on 28.12.2009
