The pessimistic scenario might become the “baseline scenario.” And the recent shock that shook Turkey intensifies this possibility.

I wrote the paragraphs below about 10 days ago and postponed releasing them. Can you believe how quickly the conditions and agenda change in Turkey! So, below you can see the worse-case and best-case scenarios. This is the original version I wrote 10 days ago. I did not change a word: 

“What could be the optimistic scenario for 2014? There are three key factors that would enable a more positive outlook for the Turkish economy: first, the Federal Reserve (FED) postpones the tightening to a later date and tapers only a small volume of bond purchases. Second, even the FED initiates tightening, it makes a limited impact on financial markets. Third, the European Central Bank (ECB) launches another wave of quantitative easing. A forth factor, which probably won’t be as influential as the first three would be a remarkable drop in oil prices.

In the event that all of these four assumptions hold, we will evidently have a highly optimistic scenario for Turkey: the level of net capital inflows reaches as high as it was in the first four months of 2013. Domestic credit growth rate changes depending on the actions of the Banking Regulation and Supervision Agency (BRSA). It probably exceeds the current growth rate. Interest rates decline remarkably, lira appreciates in real terms. Under these circumstances, growth rate probably exceeds 5 percent. Inflation falls slightly below the 2013 average and stands around 6.5 percent. High growth and real appreciation push up and the fall in energy prices push down the current account deficit. Deficit to GDP ratio stands around 7.5 percent. Unemployment rate moves down to around 10 percent.

Of course it would be overly optimistic to expect that all factors evolve in favor of Turkey. So the figures above should rather be taken as the upper threshold of the optimistic scenario. On the other hand, even one of the four factors develops in our favor, there would be room for optimism for Turkey, with figures developing in the positive direction if not as strongly as I claimed. Please note that all of the factors that construct the optimistic scenario are beyond Turkey’s control. There is no way Turkey can make those happen. This fact alone is enough to prove Turkey’s vulnerability to global dynamics. Clearly in today’s world, such interaction holds for a large number of countries; but Turkey is one at the top of the list. This is indeed one of the key challenges facing Turkey, and we all know the reason: given the low domestic savings rate, even a moderate growth rate requires foreign borrowing.

We have to return to potential international developments concerning the pessimistic scenario as well. The prime factor again is that the FED announces net week that the tightening will be initiated immediately and reduces purchases at a considerable level, causing a significant decline in risk appetite. These imply a sharp decline in net capital inflows, rise in interest rates, real depreciation of the lira, and a considerable drop in domestic credit growth rate even without the BRSA taking any action.” The following paragraphs are added today:

As of the present day, the first two elements in the optimistic scenario are ruled out since the FED has initiated the tapering and the reaction of the financial markets to emerging markets that are considered problematic was negative. The only factors that might still hold are the potential steps of the ECB and the fall in oil prices. Under these circumstances, the pessimistic scenario might become the “baseline scenario.” And the recent shock that shook Turkey intensifies this possibility.

This commentary was published in Radikal daily on 21.12.2013