Witch hunt hurts Turkey’s financial center aspirations, economist says

ISTANBUL- Hürriyet Daily News

The effects of the 2001 reforms are decreasing and additional reforms that should have been made in the good times, when the harmful effects would have been less keenly felt, were not made, says Uğur Gürses. DAILY NEWS photo, Emrah GÜREL

The probe initiated into financial transactions during the Gezi protests, attempting to identify members of the so called “interest rate lobby,” has damaged Turkey’s aspirations to become a financial center, according to economist Uğur Gürses. The obsession is preventing the Central Bank from taking the right decisions at the right time, Gürses told the Daily News in a recent interview. “Even the government cannot define the interest rate lobby,” he said.

What would be your essential observation when you look to the current economic situation in Turkey?

Turkey is now at the end of a period when it has used some of its important advantages. There was a positive wave that came due to the 2001 economic reforms, and then we witnessed a world conjuncture with the liquidity flush. The advantage of the liquidity flush combined with Turkey’s economic reforms. However, reforms that should have been made in the good times, when the harmful effects would have been less keenly felt, were not made.

Why are we at the end of this period?

The effects of the 2001 reforms have started to decrease. And no additional reforms were undertaken. I think the reason why reforms were not continued was the feeling of extraordinary self confidence that the government gained. A lot of money came from abroad and we were registering good levels of growth, which led to the feeling: “Why should we do any more reforms. We are growing OK, we are doing it fine.” There was no fight against inflation.

For those remembering the high inflation rates until the 2000s, having inflation rates that are below double digits looks like a good performance.

But we have to compare it with our competitors. As the inflation rates in our competitors are not so high, this decreases our competitive capacity. So long we don’t bridge the inflation gap with other countries it will be a disadvantage for us. Industrialists, exporters, everyone is complaining about this. There are reforms that would increase Turkey’s competitiveness. Reforms on energy should come first.

How will the change in the international environment affect Turkey?

The U.S. Federal Reserve will slow its purchasing of assets, and in a few years time rising interest rates will come to the agenda. In other words, there won’t be any reason for all the money that came to Turkey before to continue coming. In addition, there might be more radical steps undertaken in Europe following the elections in Germany in September. Turkey is a country with a current account deficit. When these funds slow down we will have less financing and that means a slow growth rate. Had we made the necessary reforms we could have fared better in such a time.

Does the economic administration sees the right picture and act accordingly?

I don’t think they do. It [the international wave] started in May with the speech of [Federal Reserve chairman] Ben Bernanke, but it coincided with the Gezi protests. The government said the outflow of capital was caused by the Gezi protests, but the real reason was the decision of the Federal Reserve. Had they been prepared, they would not have confused the two. [Deputy Prime Minister for the Economy] Ali Babacan could only say a month and a half afterwards that the Federal Reserve was the main reason.

Perhaps the economic bureaucracy had already made a correct analysis, but could not contradict the prime minister’s accusations against Gezi protestors.

It could be. But there are steps to be undertaken when the wave starts that show whether you are prepared or not. When the Lehman Brothers crisis sparked in 2008, the Central Bank took a number of measures and it was due to these measures that we fared relatively well at the time. It has been nearly three months since Bernanke’s statement and I don’t see the Turkish Central Bank acting accordingly. I think they are late in monetary policy, in monetary tightening. As you know, they are obsessed with the interest rate lobby, they are obsessed with keeping interest rates low. That obsession prevents the Central Bank from taking the right decisions at the right time.

What is this interest rate lobby?

It is not defined. Even the government can’t precisely identify it. It’s a group, sometimes it’s the bankers sometime it is the foreigners. But it is very vague. But the prime minister believes in the interest rate lobby. A witch hunt has been started in relation to the interest rate lobby.

If investigations have been initiated into monetary transactions during the Gezi protests, this shows that the concept of interest rate lobby is not simply fictional for the government, it must really believe that such a thing exists.

Both the Capital Markets Board (SPK) and the Banking Regulation and Supervision Agency (BDDK) have started probes and they are still continuing to investigate. Some looked at the capital exits and the falls faced by the stock exchange during the Gezi events and thought that some people were trying to topple our government. So, they are trying to find the witch. But when you look at the statements, they give the impression that they don’t have anything concrete in their hands, but will just take a look. Perhaps the civil servants don’t believe in the interest rate lobby, and conduct the investigations just because the prime minister wants it. Still, even if this is the case, I think this has tremendously harmed Turkey. It has damaged Turkey’s aspiration to be a financial center and the reputation of the financial authorities.

What does this type of witch hunt tell us about Turkey?

There has been record amount of bond entries to Turkey. When investors come to Turkey we applaud them, but when a few of them exit we start a witch hunt. I think this is disgraceful. This either gives the message that the administration is not conscious of the economic factor, or it is conscious but uses it as political leverage.

This means we have not yet reached the level of a liberal market economy.

Of course. Investors always look at whether rules are changed or not during the game.

So, is Turkey changing the rules of the game?

Not yet, but some irrational stuff is happening on the playing field. If the investors are not showing a sharper reaction, they might also be thinking that these things are being done for political reasons. They might think there is rhetoric, but it is empty. However, if the trend continues we might see in the future some negative reactions.

What should Turkey be prepared to?

We need to correctly read the international conjuncture. I don’t think the politicians in Ankara are competent enough, for this or that reason, to read the foreign conjuncture. The Central Bank included in this. In 2011 the Central Bank lowered interest rates, showing the foreign conjuncture, and then it increased them again. This shows that they don’t have a proper reading of the situation. There is always the following conviction: “Look at the last 10 years, we had ups and downs, but we always pulled it well, we are successful.” But this extraordinary confidence could prove costly to Turkey.