Coupling measures decoupling economy

"GLOBAL UNCERTAINTIES WILL LESSEN SOMEWHAT IN THE MONTH OF SEPTEMBER,” Deputy Prime Minister Ali Babacan said during a televised interview conducted with him in August, adding, "Of course, we are prepared for every kind of scenario.” At a time in which global tremors lead to fluctuations in the finance and stock markets, Turkey's strong stance is the result fo the preparations Babacan speaks of. Ali Babacan, who also currently presides over the Economic Coordination Council, has been one of the leading players in how the needle of Turkey's economy has been rising since he came to power four governments ago. 
How do you think the Turkish Lira's depreciation will affect inflationfi There is still a slack in the Turkish economy which will limit the pass-through from commodity prices to the prices of core goods and services. Also, rise in the global commodity prices will ultimately lose its pace. Consequently, the recent depreciation of Turkish Lira will have a limited effect on the inflation and increase in the inflation will be temporary. 
As the glimmers of strength in the global economy are fading away and some major economies are on the verge of recession, in my view the main source of concern is the global economic slowdown rather than the inflation threat. 
Could the credit limitations placed on banks be considered for 2012 as well? After displaying a solid growth of 33.6 percent in 2010, banks have been called on to limit their credit growth to 25 percent, a level that is in accordance with domestic and external macroeconomic balances. Main culprit behind this cap was to mitigate the macro-financial risks and balance the growth dynamics in the sense that domestic consumption was fuelled by bank loans which eventually brought about growing current account imbalances. 
Recently, interest rates on deposits and credits have started to climb. In addition, we are observing shifts in the balance sheet compositions of banks indicating that banks have become more responsive to their liquidity positions and increasing dependence on central bank financing. All in all, these developments suggest that we will witness further slowdown in credit growth and domestic demand in the upcoming months. 
Does growth have to slow down for the current account deficit in Turkey to reach modest levels?
The measures we have implemented so far narrowed the divergence in foreign and domestic demand by controlling the credit growth - hence, keeping the current account deficit in check. 
We are giving utmost importance to structural solutions for decreasing the current account deficit. In this regard, we have applied structural and medium term policies for reducing the dependency of intermediate goods imports. Energy sector reform program including issues such as nuclear energy, renewable energy, energy efficiency and privatization of distribution and generating companies have been carried out since 2003. A new investment incentive system and R&D and Innovation Support Program were put in to practice aiming to increase the competitive power and increase longer term capital inflows to the country. The Assessment Council on Export-Oriented Production Strategy was set up in order to develop strategies to increase the in-house production of intermediate goods. 
How do you assess the Central Bank's measures and policies particularly in the face of developments occurring in Europe?
The deteriorating growth outlook in our major trade partners will have an adverse impact on our external demand, whereas domestic demand is expected to moderate as well due to rising global uncertainty. Central Bank of Turkey 
has taken a number of timely and preemptive measures in order to contain the repercussions of global uncertainty on our economy. In this regard, Central Bank recently reduced its policy rate 
by 0.5 point to 5.75 and cut the foreign exchange required reserve ratios by 0.5 point for all maturities. This monetary policy reaction also together with its accurate forecast performance once again enhanced Central Bank's credibility. 
Do you think there is a need for the government to take certain fiscal measures to put the brakes on the rapidly developing credit volume and increasing current account deficit? 
Recent indicators show that credit growth is diminishing which will have positive reflections on our external balances. The government and the authorities are closely monitoring the developments and taking required actions when needed. 
In the face of widening current account deficit, increasing domestic savings is crucial and economic policy framework has been drawn within this context. We consider reducing the dependence on external sources for financing the growth as a matter of priority. For this purpose, we give utmost importance to policies for increasing domestic savings, particularly public savings. That is why, as the government, we are determined to imp-rove public savings through sustained fiscal discipline. 
Could the Tobin Tax or similar practices constrict the current account deficit?
Efficient financial intermediation and a dynamic financial sector are essential for the proper functioning of a market economy but it is also important to ensure that excessive capital inflows do not disrupt economy's fundamentals via distorting financial stability and creating fragility. That is why several emerging market economies have implemented measures so as to restrict capital inflows and ease the appreciation pressure on their currencies. In this regard, policymakers gave Tobin tax the benefit of doubt. However, in a global setting of ample liquidity, interest rates hovering around nil in the developed markets and widening growth gap between the emerging and developed economies, this popular means has not been an efficient instrument to deter capital inflows or limit the appreciation pressure. 
Bearing in mind all the shortcomings and other countries' experience with the Tobin Tax, the odds are high that this sort of tax would not be the appropriate solution to fix our external imbalances problem. Furthermore, as the government, we do not want to deviate from 3 frees, namely, free capital flows, free trade and free floating exchange rate. Hence, we are of the view that it's wise to find alternative and more robust ways such as struc
tural reforms which will provide gradual improvements in current account balance instead of consulting to indirect ways.
There are some who think that Turkey will decouple positively in the face of developments in Europe. What are your views on this?
Turkey is one of the most dynamic emerging economies which have rapidly recovered from the global financial crisis. The prominent macro and structural indicators in the post-crisis period suggests that our economy will experience a positive decoupling in the forthcoming period thanks to the strong fiscal and financial system. 
While the European economies struggle against debt problems, Turkey has a very strong fiscal structure. In addition to the strong fiscal position, Turkish banking system is ranked among the best performing countries in Europe. Probably the essential factor ensuring positive decoupling is the political stability in Turkey. Confidence of producers, consumers and investors depends on political stability which is lacking in many countries leading 
to delays in the decision-making processes. 
Consequently, although both the worsening outlook for global economic activity and rapidly increasing concerns on the debt sustainability in Europe has increased the risk of a renewed slowdown in the global economy, the negative impacts of these developments on our economy is expected to be limited on account of strong macroeconomic fundamentals as well as timely implemented fiscal and monetary measures. 
How do you consider the warnings of overheating directed toward Turkey? Do you believe we are about to face such a risk?
With the latest grim outlook in the global economy, I think the overheating debate is out of context now. The measures that we have taken so far were particularly focused on "over-borrowing” not "overheating”. Latest data releases also confirm that credit growth has been losing steam, vindicating the effectiveness of the policy measures taken so far. Furthermore, macroeconomic indicators signal a moderation in the economic activity. On the supply side, industrial production, capacity utilization rates and business confidence indices increased moderately starting with the second quarter of 2011. On the demand side, modest increase 
in domestic durable goods-sales and the weakening of consumer confidence give signs of a deceleration in the consumption growth in the forthcoming period. Similarly, macroeconomic gauges such 
as imports and production of investment goods and sales of commercial vehicles also point out to a slowdown in the investment expenditures. All these imply that growth likely slowed down in the second half and year-end growth figure will be modest compared to last year. 
Are there any messages you wish to convey to foreign investors? Structural reforms implemented in the last decade are one of the main factors behind the favorable economic performance and remarkable recovery of the Turkish economy from the recent global crisis. Our government is committed to enhance the effectiveness of all these reforms, to urgently implement the required complementary legal provisions and consolidate the successes we have achieved so far. We are determined to institutionalize what we have done to date on the economic front. That is why Prime Minister Mr. Erdoğan defines the next four years as "a period of mastership”. 
One of the priority areas, in this respect, is a brand-new constitution in line with EU standards which will improve the democratic nature of our country and introduce more liberties. In the meantime, we will implement active employment policies so as to increase employment and enhance the qual ity of labor, which will bring efficiency gains and increase the sustainability 
of growth. Energy investments will be given priority. We target both ensuring reliable supply of energy needed in the growth process and also lowering energy dependency and energy bill which constitutes the bulk of our current account deficit. Structural reform process in the health and education is continuing in an accelerating pace, which is significantly reflected on the budget appropriations. Big transportation infrastructure investments are underway and new projects are on our agenda. Legislative reforms to follow developments in international law regimes as well as to harmonize with EU legislation are also in process. 
Our determination towards creating a stable economy has lured investors and Turkey will maintain its position as a safe haven and attractive investment venue offering high growth potential, stability and access to a wide geography. 
Published on Thursday, October 20, 2011
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