Risks of the 2014 budget and economy

Preparations for the year 2014 have started. The budget and program for 2014 has been approved at the Parliament’s Planning and Budget Commission; in other words it has been finalized to a great extent. It will now be debated in the general assembly and voted into law.

When we take a look at the Medium Term Program and the 2014 budget, it can be said that a general course similar to this year will be pursued. There are targets, such as increasing the rate of savings and decreasing the current account’s deficit figure, but it is obvious in 2014 very important steps on these matters will not be taken. Because of the local elections in 2014 and after that, general elections and presidential elections, it would have been an extremely ambitious target to eliminate these vulnerabilities in the economy in the two years ahead of us. For this reason, not much of a change is foreseen.

The budget and program targets are confirmed; however, we cannot say the markets are looking at these targets. The eyes of the markets are at international developments because in order to reach the essential targets such as the inflation and growth, and also for their consequences, the developments abroad will be determinant. In other words, it will be the decisions of primarily the U.S. Central Bank, the FED, and those decisions made in developed countries that will determine the foreign exchange rates and interest rates in Turkey, rather than domestic economic developments.

Indeed, staying within the targets of the budget program, domestic decisions that would be made for the local elections to be held on March 30 that would also affect the economy, the atmosphere that would be formed depending on the results of the elections and also preparations to be made for the general elections and the presidential elections will affect the equilibriums. In other words, whether or not an election economy will be implemented will be effective during this process.

Besides that, the foreign policy developments of Turkey, which are becoming more and more problematic, and their possible consequences and also the state of affairs of the domestic social atmosphere, will be factors that would affect both the elections and the economy.
FED decision

However, no matter what, none of these are expected to be as effective in the economy as the decision FED will make. It is also a fact that the peaceful atmosphere being recently experienced with Iran and its effect on oil and foreign exchange will remain far behind this development.

The decision FED will make in the coming days, when and how much it will cut its bond buying program will be determinant for the economies of developing countries such as us. Whether Turkey will be separated negatively from other developing countries as it happened recently because of the domestic and external political problems, we will live and see.

Because the country is becoming more and more foreign-dependent, the Turkish economic equilibriums can rapidly change depending on foreign sources. Apparently, it will not be very easy to break the dependency on hot money in the coming short and medium terms. For this reason, the situation of global liquidity and the decision of FED for this are becoming more decisive.

In short, the determinant for the Turkish economy in 2014 will be when and how much FED will cut liquidity. It is certain that next year’s liquidity will start shrinking and this will challenge the foreign exchange rates, interest rate, inflation and growth targets. It is the timing and the dose of the deterioration that are being wondered.