Turkey ‘on knife’s edge’ as global economy set to stutter in 2016

Barçın Yinanç - barcin.yinanc@hdn.com.tr

Turkey needs to prioritize structural reforms as 2016 will be more economically tough than last year, CNN Türk economic news head Emin Çapa has told the Hürriyet Daily News. 

Çapa said Turkey already has the necessary assets to surf above the global wave, stressing that it must not be distracted by unnecessary debates over shifting to the presidential system. 

If you were to make a general economic evaluation of 2015, would you say it was a “lost year” because of the elections?

I couldn’t say it is just one lost year, because the last four or five years have been lost years - like a return to the 1990s. We need a set of new structural reforms but we just cannot get it going. We haven’t been able to increase our GDP per capita, which reached $10,000 in 2008 but hasn’t made it past $11,000 since then.

We’re now paying the cost of not initiating reforms in recent years, and 2015 was the year when this fact slapped us in the face as our GDP per capita dropped back below $10,000.

If elections are no justification, what’s the reason behind this inaction?

The government has been lucky so far. Our high growth ended in 2007, but that’s when the global economic crisis started. Thanks to the U.S. Federal Reserve’s low interest rate policy after the crisis we continued to grow, but then we stopped again. This time we started to blame the international crisis.

What kept us getting us so far were the reforms initiated in 2000s. This program was called a “transition to a strong economy.” We should have followed this transition program with a strong economy program, but this was much harder to conceptualize. We need to make specific reforms, but instead we just keep giving incentives to everything. Giving incentives to everything means giving incentives to nothing. You need to specialize on specific things. Look at Korea; look at China. We export high technology products worth $2.2 billion, while South Korea exports $130 billion. To reach that level you need to reform the judiciary, the education system. You need to transform the structure of the private sector and reform Turkey’s governance style.

So what is your projection for 2016?

2016 is going to be much more difficult for the world than 2015. Interest rates have been low up to now so dollars poured like rain. Now, the Fed has said it will cut this money flow by raising interest rates. Some countries have started preparing for this like Indonesia, like India. We are at a critical junction, a knife’s edge.

If Turkey starts writing a new story and starts a new reform wave, we could surf above the global wave. We could successfully pass this critical stage with structural reforms, if we prioritize reforms and convince the world. Otherwise we will sink under the wave.

What are the signals that the government is giving?

The government’s recently announced “action plan” did not satisfy the markets. It was about fulfilling election promises, not a structural transformation plan.

Obviously, the minimum wage should be increased. But while the farmer is to be further supported, for instance, we don’t see anything about a structural change in the agricultural sector. What’s more, cash has been pledged for those who want to set up new businesses. That’s fine, but I don’t see what will be done to increase high technology exports. I want to hope that a program to transform the economy will follow, but if we prioritize debates over things like the presidential system then we will sentence ourselves to low growth levels.

Do you expect debates over the independence of certain key economic institutions to continue over the year?

We shouldn’t forget that the independence of institutions like the Central Bank played a key role in the economic success of the government. The moment you open to debate the independence of such institutions, Turkey becomes a risky country.

If there is pressure on the Central Bank, Turkey will be seriously shaken. We are approaching a period when we will see whether or not this pressure will have an outcome. In spring a new Central Bank head will be appointed, as well as the members of the monetary policy board. Who will be appointed? Someone nice who will just listen to the government? Someone who believes “interest rates are the result of inflation,” an economic theory that nobody has ever heard of? Or someone who says “the Central Bank is independent and I’ll act according to the requirements of the economy”?

What do you think will be the effects of foreign policy on the economy?

It doesn’t seem likely that our southern neighbors will become more stable this year. Tension with Baghdad is a new source of risk. The Syrian market is closed. Not much is to be expected with Egypt. Relations may improve with Israel but that can’t compensate much. The window of opportunity is Iran: If Iran’s integration with the world gains pace, there is greater capacity for Iran to buy goods from us rather than Europe. But that will not happen immediately.

Russia is a huge market for us, important for exports, tourism, and construction. How far President Vladimir Putin continues Moscow’s current tough stance will be critical for us, but Turkey being completely devastated by Russia is out of the question. Turkey could also hurt Russia economically.

The EU’s sanctions against Russia have been extended, and Russia will contract economically over the next year. Everyone thinks only we sell agricultural products to Russia, but Russia also sells agricultural products to us. We buy wheat from Russia, but we can buy wheat from whoever we want. We buy iron, but we can buy iron from whoever we want. Russia, meanwhile, will have difficulty selling these products elsewhere.

However, we cannot predict where the Russian reaction [to Turkey’s downing of its jet] will stop. There is no doubt that Turkey will also have to pay a high cost. So we need to push stronger for EU integration, and if we can undertake necessary structural reforms there are two other openings we could make: One towards the Far East and the other towards Latin America.

What about the private sector in Turkey?

Turkey’s private sector needs to transform. But nowhere in the world does the private sector transform on its own; governments call on businesspeople to make that change. But why should they invest in high technology when they currently make tremendous profits from the construction sector?

Your final assessments for the future?

We need good governance in the public sector, more respect for human rights, democracy, and education reforms. A return to the Kurdish peace process is also necessary: One of the biggest risks is if the interruption of the peace process continues and we fall into terrorism turbulence like in the 1990s. You can’t limit the effects of this to the economy alone.

They say there will not be elections for four years, but I expect a referendum on a constitutional change and then presidential elections. My fear is that both of these will further postpone structural reforms. We can’t do both; we can’t debate the presidential system and pass tough reforms at the same time.

But I’m a positive person. If we prioritize reforms, then we can succeed like Spain and South Korea. If they did it, we can do it too. I’m confident we have the potential.

What makes you confident?

First, while our general education level is low, we do have world-class educated people in Turkey. Second, the current level of household debt is low. Third, our flexibility makes us more immune to crises. Fourth, there is no country in our immediate geography – east, west, north or south - with our level of industry, production quality, service sector, or financial sector. These are huge assets.