Turkey debate: Learn more about the panelists
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EXECUTIVE SUMMARY
• The Turkish economy is outperforming on the back of a strong financial sector and fiscal discipline
• In the absence of IMF intervention and EU imperatives Turkey needs to create its own anchor of self-discipline
• Turkish industry is competitive in terms of location, a strong technology base and high labour productivity
• Banks benefit from a low loan-to-deposit ratio
• Obstacles to the development of a local-currency corporate bond market need to be overcome
• Strong economic growth is expected for 2011 |
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Simon Brady Let’s start with Turkey’s recent impressive performance relative to other emerging markets and indeed the developed markets.
PYD, Garanti This time last year we were discussing why Turkey was performing so badly. Now we are discussing why the country is performing relatively well. I believe that there are two basic reasons for this: the strength of its financial sector and its fiscal discipline. The Turkish financial sector is very strong thanks in part to the response to the 2001-02 crisis. That crisis also led to significant public sector reform in the country, which in turn improved Turkey’s overall financial position. In addition, in September 2009 the government stated its intention to implement the fiscal rule and a three-year programme. I think this was very timely and it helped perceptions improve. Importantly it allowed Turkey to achieve a fall in real interest rates. The question is, will fiscal discipline be maintained?
More generally, the Banking Regulation and Supervision Agency (BRSA) has done a very good job and that should continue. Its independence is important. And the central bank is also doing a good job; it has been very brave in its actions and should continue to be brave in monetary tightening.
The only issue is the current account. This might become a medium-term to long-term problem and now it is the turn of the policymakers to announce a plan on how to deal with that problem on a structural basis. It is not something that the Central Bank of Turkey can deal with on its own; there should be a master plan on how to increase Turkey’s competitiveness on a long-term basis.
TE, Garanti The interest rate is an interesting issue. Before the crisis people said that whenever real interest rates are negative in Turkey, it is a sign of problems to come. But the response – and I agree – was that this time it is different. In 2000 the fall in real interest rates was directly a result of hot money inflows that crowded out the market and artificially lowered the real interest rates.
TT, JPMorgan If you look at the fiscal situation at that time, the numbers were not reliable. What was reported as a budget deficit of 8% to 10%, because of the way certain items were accounted for, was more likely to have been between 20% and 25%.
TE, Garanti In 2000, the indebtedness of the government was increasing dramatically and yet real interest rates were falling. What is different today is that real interest rates are falling because of the improvements in the indebtedness of the sovereign, the fiscal performance of the government and the success of the financial sector. All these positives suggest to me that Turkey’s improvements are sustainable this time.
TT, JPMorgan But it is crucial that in the absence of its traditional anchors, Turkey can maintain self-discipline and maintain the improved perception of the country. For a decade the anchor was the IMF. Then it was the IMF and the EU and then one or the other. In the absence of both, which has only been the case for the past two years or so, the country needs to prove it can create its own anchor.
TE, Garanti Self-discipline is extremely important, although, as Fitch announced, and I agree with it, we have to see the implementation of the fiscal rule. If it is executed then I believe sustainability will no longer be a problem in Turkey.
Simon Brady Michael, what is the EBRD house view on Turkey?
MD, EBRD Most of our perspective on Turkey comes from what we see within businesses while we are building a portfolio here. This allows us to identify the opportunities for the EBRD to be engaged, and those occur where there are gaps in the market. It is clear that the relative competitiveness of Turkish industry is one of its strong points. This competitiveness comes from a number of things, including regional location, the engineering base, the rapidly growing technology base and labour productivity – and by that I don’t simply mean cheap labour. The banking sector is another positive, clearly. But there are still actions and reforms needed. The fiscal rule is one thing; the medium-term plan is another; completion of reform in the energy sector is critical; completion of the infrastructure privatization programme is extremely important.
We are seeing remarkable levels of confidence from investors that these reforms will be completed despite the amount of work still to do. For Turkey to take advantage of all of these positives, it needs to be able to deliver the finance. Again we are seeing this narrowly from our perspective.
One of the lessons for Turkey during the past two years has been when international financial flows stopped, as Tolga mentioned, you are on your own; the IMF does not have a current programme; the EU is very important for the reform process, but that is now being increasingly internalized. Capital flows to support investment are critical. The growing confidence we are starting to see now with interest rates coming down and longer-term monetary stability should lead to longer-term savings, delivery of capital from domestic capital markets and a deeper, broader banking sector able to fund what is a very ambitious programme.
Simon Brady It is often said that Turkey’s banks have fared particularly well through this period. But is this the view of impartial observers such as the ratings agencies?
