Fatih Özatay, PhD - [Archive]

Why should we worry? 26/05/2011 - Viewed 1200 times

We are going through an interesting period, indeed. Such a picture is open to all sorts of developments. The foresighted would take all measures at his/her disposal.

There are a number of reasons to be worried. It is wise to list those once again. First, current account deficit has reached high levels. Second, this deficit is financed predominantly with short term capital inflows. Third, short term capital inflows are expected to slow down since the factors enabling the current volume are only temporary: interest rates in developed countries will eventually increase and the monetary expansion that emerged after the global crisis will come to an end.

Fourth, one of the factors that triggered the previous crises in emerging market economies was the attempts to increase the interest rates. Therefore, a new process of interest rate hike is dangerous with this perspective. Yes, many emerging market economies are performing much better and one can question whether this experience is still valid. However, these countries are still faced with serious weaknesses. For instance, Turkey can attain high growth only if it can access foreign funds (that is, if it can increase the current account deficit). For instance, some countries including Turkey act reluctantly in increasing the budget revenues and limiting budget expenditures in good days; the importance of additional tightening is yet to be understood. 

Rapid credit expansion

Fifth, the banking sector is going through a rapid credit expansion. Now everyone knows that on the way to the global crisis, rapid credit expansion created bubbles particularly in the housing sector and the burst of that bubbles triggered the crisis.  Also, academic studies indicate that almost half of the financial crises before the global crisis were preceded by a process of rapid credit expansion. Rapid credit expansion can cause bubbles in a number of markets and we do not know when these will burst. What we know is that if the inflows halt suddenly, bubbles can burst in the case of which some of the banks that extended credits as well as those who borrowed face difficulties.

Sixth, visual and printed media is full of advertisements on luxury residences and plazas. This phenomenon has never been that visible before. Seventh, the Middle East is going though and unprecedented period which will inevitably affect Turkey. 

The European Union could not settle down
Eighth, the European Union could not settle down. We do not know whether the Union will preserve its position. In fact, it is obvious that nothing will be same for the Union, but how it will be, we do not know. Also, we do not know how this will affect Turkey. Therefore, we are faced with a huge uncertainty.

Ninth, we are trying to solve the current account deficit problem via monetary precautions alone. This is an unimaginable mistake. Is the economic policy that desperate and weak? Tenth, we are bragging about the "tightness" of the fiscal policy. However, experts know that budget figures must be adjusted to the conjunctural effects. Simply, "structural budget deficit" is higher (lower) than the announced level in periods of rapid (slow) growth. In short, with this lens one can easily identify that the fiscal policy in 2010 was looser than that in 2011. But how can you loosen the fiscal policy in a year with such a high level of current account deficit?

We are going through an interesting period, indeed. These days are interesting as they are different than the usual. Such a picture is open to all sorts of developments. The foresighted would take all measures at his/her disposal. Those without any common sense or any measures at their disposal, however, shall bow to the inevitable.

This commentary was published in Radikal daily on 26.05.2011