Turkish economy needs a new story

After years of encouraging comments about the Turkish economy, the warning bells have started to toll in many reports. Why now? As we all know, what has happened is that the economy’s most chronic problems have not been solved for the last decade. This despite the fact that there was hope about solving these problems gradually, with a stable government, after years of unstable coalition governments.

The latest warning came from Fitch on March 24, after the agency made no changes to Turkey’s credit rating and outlook.

Fitch Ratings representatives warned that Turkey may suffer the same economic instabilities as it has in the past after the upcoming general elections, with a high growth-based economic policy.

“The economy administration will transfer its duties to a new administration one day. The point is here to what extent the new administration will favor current high-growth policies. The risk is that the more the new administration favors such policies, the more pressure there will be on the Central Bank to cut interest rates, and the higher the possibility that the Turkish economy may face past instabilities with a 5 percent growth target, instead of an expected growth rate of around 4 percent,” Fitch said.

The Turkish economy saw quite high growth rates a couple of years ago, even hitting the second highest growth rates in the world after China.

There were several reasons behind this trend. First of all, high levels of foreign funds were flowing into all emerging markets, including Turkey, in line with the Fed’s radical policy of pouring billions of dollars into the markets. The high liquidity party is, however, now about to end.

Secondly, Turkey has focused on an export-based growth policy for the last decade. The country’s exports increased from $73.4 billion in 2005 to $157.6 billion in 2014, rising by over 100 percent.

However, this policy has serious drawbacks when the basics of the Turkish economy are considered. As many economists and analysts say over and over again, Turkey cannot manufacture goods without importing most production inputs and materials. The more the country produces, the higher its imports, thus worsening its current account gap, which is one of Turkey’s weakest links.

Another foundation of the high-growth policy - the rise in the construction sector - is also problematic. Turkey’s construction sector soared by around 13 percent between 2009 and 2013. Thanks to a number of government-backed “crazy projects,” and demand for new housing, growth in the sector is bound to continue. But many analysts say this growth is not sustainable. Purchasing all materials in Turkey has been becoming increasingly expensive of late, as the lira has suffered big losses of value against the U.S. dollar. It is also not easy for construction companies to find financing for their projects at the moment. And domestic demand is expected to decrease in the near future upon the losses in the lira.

Last but not the least, the government is currently not giving robust signals about making structural, even micro reforms, in order to maintain confidence in the Turkish economy.

Nobody can deny that the government achieved many significant reforms in the economy until 2008 and closely followed a strict economic program, which was established by the previous economic administration just after the 2001 banking crisis. Such constructive policies, however, appear to have come to an end, and Turkey urgently needs to start writing a new economic story, as confidence matters in economic issues, more than anything else.