Trillions seeking refuge

Turkish economic growth figures for the third quarter were impressive to say the least; a year-on-year expansion of 8.2 percent puts Turkey at a nine-month average growth rate of 9.6 percent, surpassing even China, while September unemployment data released yesterday added more fuel to the conviction Turkey could emerge from the ongoing eurozone crisis relatively unscathed. Indeed, the ratio of jobless fell to 8.8 percent, the lowest rate in the past six years. This means that in the past year, the economy has created 1.8 million jobs.

Income distribution and the quality or duration of those jobs should be among the issues raised, but the global picture is so severe not many analysts investigate what lies on the other side of the coin. Concerns generally voiced are those regarding a lack of sustainability of the current account deficit, and in the current climate of Justice and Development Party-triumphant, those voices are becoming increasingly hard to hear. A few days ago, an economist speaking at a private TV channel was mocking some of his colleagues of always seeing the bad side of things, praising the government’s performance. I tend to think otherwise: the pro-government voice is so loud that those who beg to differ are finding it increasingly hard to speak. And when they do, it is not infrequent they are labeled cohorts of an “interest rate lobby” surely linked with the Ergenekon gang!

To cut a long story short, the future of Turkey’s economic success story hangs in the balance regarding the current account deficit. As of October, the 12-month deficit reached $79 billion, above 10 percent of gross domestic product. 

“Nearly all of the $4.2 billion deficit in October was financed by Central Bank’s foreign exchange reserves, as was the case in August,” say Oyak Investment analysts, pointing to a key vulnerability. In his note, Timothy Ash of RBS underlines the “net errors and omissions” item posted a surplus of $950 million in October. Capital inflows through this “shadowy” item total $13.1 billion for the first 10 months of the year, making many wonder what kind of an “omission” this is. 
As was the case in Turkey’s previous crises, a halt in foreign inflows financing the current account gap would have disastrous consequences, with the painful “correction” in exchange rates eroding the lira, setting in motion a snowball that would wreak havoc on the real economy. Thus, the domestic situation is inherently tied to the global one.

However, global conditions for such a halt have definitely not matured. In his Dec. 13 analysis, Charles Dumas of Lombard Street Research points toward an “excess of saving.”
 
“With world capital spending restrained (excluding China) ... a record savings rate means the private sector’s surplus of saving over investment is 6 percent of GDP in the OECD,” Dumas said. This amounts to around $3 trillion seeking a “safe haven” to park amid an unprecedented environment of low interest rates and meager growth in the West. 

Thus, while a deepening of the eurozone crisis would surely shake Turkey’s export machine, the picture is not so clear regarding short-term foreign capital. It might flee emerging markets to find refuge in the U.S. dollar, a move which would spur another global recession. Or it might remain parked at emerging economies, providing some shield from the turmoil in the West. 

Whatever the choice is, the fact that governments have “de facto” tied the fate of their economies to such outside factors show they have not succeeded in “emerging” from neoliberal tales yet. 

In this respect, I feel compelled to repeat Erinç Yeldan’s latest warning in his Cumhuriyet column: The economy that’s the most favored by international finance-capital is the most prone to a new crisis.