Alarm bells of the economy

We were lucky up until now while we attributed accidental negativities to external excuses. But now when all of them come gushing forth at once, finding excuses does not help; the structural problems of the economy together with political issues and mistakes are setting off alarm bells. 

Regardless of the results of the June elections, Turkey was entering its most problematic period because there was no time left to solve issues. 

Now, the bells are ringing loudly for the economy. 

First, domestic demand growth is at its lowest in the last three years; there is no possibility of it accelerating in the short term. The reason for this is that spending and growth were based on high household consumption, which was based on bank loans. They, in turn, were based on the abundance of inflowing foreign currency. This is over now. 

There are no low interest rates left either. A limited increase in savings means a limited growth in loans. 

Also, the fact that consumer confidence is at its lowest point despite available loans has curbed domestic demand. 

Second of all, exports, which acted as a savior at times of weak domestic demand, have decreased despite the hike in foreign exchange rates. The reason for this is attributed to euro/dollar parity – in other words, the devaluation of the euro, but there are losses in many markets to which Turkey sells in dollars. 

For instance, in the first seven months of the year, exports to EU countries in euros went up from 29.4 billion to 31.5 billion; on the other hand, its dollar equivalent witnessed a $5 billion loss. As a matter of fact, total exports declined from $88.5 billion to $77.5 billion during this period. 

The decline has totaled $10 billion, which is twice the loss stemming from the devaluation of the euro. While the Turkish Lira gained 3 percent in value last year during the same period, this year the lira gained 13 percent; despite this, however, exports fell. 

It is noteworthy that the lira’s losses of about 40 percent in two years have not accelerated exports. 

Third, tourism income, which is the second important item generating foreign currency, has fallen. Tourism income in the first six months of the year is 9 percent lower than last year. Such a trend may result in tourism income, which was $34 billion last year, to go down to $30 billion this year. This means that the national income will fall 0.5 percent. 

Among the basic causes for the fall in tourism is the crisis in Russia. The number of incoming tourists from the country fell 25 percent in the first six months of the year. However, there are noteworthy drops in the number of tourists coming from France, Italy, Austria and Norway also. The Islamic State of Iraq and the Levant (ISIL) massacre in Suruç and the end of the cease-fire in the southeast will probably accelerate the fall. 

Fourth is the weakening of the foreign currency flow, which was the main fuel of economic growth until 2013. Actually, reserves are eroding. While the current account deficit in the first five months of the year was $18.5 billion, there was only $5.8 billion in financing of foreign currency from known sources. Some $8.8 billion net errors and omissions entered from unknown sources, and there was a foreign currency loss of nearly $4 billion.

In addition to the slowing down of the influx of permanent direct investments, there was an exit in the portfolio investments of “hot money.”

The worst part is that the low-interest rate era of the Central Bank that we counted on has come to an end. On the contrary, it has been forced to increase rates. 

Behind all these developments is the fact that Turkey does not have a proper economic policy; we have not been able to lower inflation to minimal levels. While we keep reforms shelved, basic democratic benchmarks such as rule of law and separation of powers have diminished. 

Moreover, the cease-fire and peace process table has been overturned; politicians who are not content with the election results are after a new election. 

The alarm bells of the economy which were ringing for a couple of years have increased recently; it makes one think that the real sector will not be able to carry all of them together. 

I hope Ankara hears them.