Could Turkey transform the global crisis into an opportunity?

by Elif Karacimen

The recent crisis triggered in the U.S. has attracted much attention from economists regarding the vulnerabilities of developed economies. Nevertheless, the heavy burden the crisis imposes on developing countries seems to have been ignored. Apart from ignoring the fragility of the developing countries to the global crisis, many mainstream economists even suggested that the recent crisis might turn into an opportunity for these economies. This is a widely expressed argument also in Turkey. The Turkish Prime Minister Recep Tayyip Erdogan said in a press conference held at the end of September that “no one should doubt that Turkey will get over current global economic crisis with minimum damage. I believe that Turkey will turn it into an opportunity.”

The argument of transforming crisis into an opportunity for the developing countries stems mainly from the belief that international investors, who have lost money in developed country financial markets, would prefer to invest in emerging market economies, like Turkey, to compensate for their losses.

However the reality for the Turkish economy is that there are many characteristics of its economy that makes it extremely vulnerable to the current crisis. The most important of them is the substantial current account deficit (about 6 % of the GDP), which makes the Turkish economy more vulnerable to the global crisis than many other developing countries. This is because is of ever-increasing difficulty in funding the deficit. Private sector borrowing and short term money flows are the two main channels through which the deficit has been financed. Nevertheless, the current crisis has obstructed both of these channels.

The private sector debt rose by 342 percent, from $43.1 billion to $190.5 billion between 2002 and mid-2008. It is obvious that as the crisis intensifies the private sector will find it very difficult to service its short term debt.

The reversal of the capital flows is another major threat to the funding of the current account deficit and also to the growth of the economy. Within the context of the IMF-led economic programs, maintenance of capital inflows became an inevitable condition of the economic growth. The economy achieved high growth rates after the 2000-2001 financial crises (6% on average between 2002 and 2007) due to the large international capital inflow. High interest rates attracted the capital flows and in turn the abundance of foreign currency led to appreciation of the Turkish lira. An overvalued exchange rate stimulated the imports of consumption and investment goods. But as world liquidity diminished foreign investors began to withdraw their money out of the country, and so maintenance of this import driven growth and also funding the large current account deficit have become impossible.

As a result, given the vulnerable characteristics of the Turkish economy, it is not reasonable to expect that Turkey can transform the crisis moment into an opportunity by attracting international capital inflows.