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2 RISKY
BUSINESS Gloomy outlook for Turkish
economy By Jephraim P Gundzik
Turkey has enjoyed strong economic growth
since the country's last crisis in 2001. Unusual
political stability has revitalized its currency,
the lira, pushing inflation and interest rates
lower, spawning a credit boom. Gathering political
instability is likely to spark capital flight and
higher inflation and interest rates in the months
ahead. Turkey's economy is likely to shrink by
more than 6% in 2007, while the value of the lira,
stocks and domestic and
international bonds plunges.
Between 2002 and 2005, real growth in
gross national product has averaged nearly 8%
annually. Real GNP growth slowed considerably in
the second half of 2006; however, economic growth
is likely to have remained above 5% for the entire
year. Rapidly expanding real private-consumption
growth has led economic growth higher. The source
of strong real private-consumption growth, which
expanded at an annual average rate of 7% between
2002 and 2005, has not seen either employment or
wage growth.
Turkey's unemployment rate
has remained stubbornly above 10% for the past
five years. Over the same period, real wages in
the manufacturing sector have contracted at an
annual average rate of about 2.5%. Economy-wide
real wages have probably contracted even more
strongly due to the government's elimination of
agricultural subsidies. These subsidies were a
significant source of income in the agricultural
sector, which employs more than one-third of
Turkey's workforce.
The primary factor
propelling strong real private-consumption growth
in recent years has been super-fast growth of
consumer and credit-card debt. Between 2002 and
2005, nominal consumer and household credit
expanded at an average annual rate of 100% and
65%, respectively. Household credit accounted for
about 20% of total credit outstanding in Turkey in
2002 and about 40% of total credit outstanding in
2005. In 2006, nominal consumer-credit growth is
estimated to have been 90%, pushing the share of
household credit to nearly 50% of total debt
outstanding.
Commercial credit has also
expanded rapidly over the past few years, notching
up average annual gains of more than 40%. The very
strong growth of household and commercial credit
suggests that credit-risk control undertaken by
Turkey's banks has been minimal. Turkey's credit
boom has been driven by exchange-rate
stabilization, which has pushed inflation and
interest rates lower. Political stability has
underpinned exchange-rate stability since 2002.
It's the politics Turkey's 2002
general elections produced a nearly unprecedented
parliamentary majority for the Islamist Justice
and Development Party (AKP). This majority allowed
the government of Prime Minister Recep Tayyip
Erdogan forcefully to pursue its top priority,
European Union accession, while simultaneously
smoothing the traditional divide between the
country's secularist institutions and
non-secularist political parties, which include
the AKP. In addition to EU accession, the Erdogan
government also implemented several economic
reforms backed by the International Monetary Fund
(IMF), including the elimination of agricultural
subsidies and accelerated privatization of
public-sector corporations.
Political
stability, advancing EU accession and IMF-backed
reforms attracted enormous amounts of short-term
foreign portfolio investment, which amounted to
nearly US$40 billion between 2003 and the end of
2006. This inflow of hot money strengthened the
value of the lira and pushed inflation lower,
allowing interest rates to fall. Falling interest
rates stimulated huge credit demand and strong
economic growth.
In addition, the
strengthening lira and falling interest rates,
combined with very rapid nominal GNP growth,
seemingly improved Turkey's credit fundamentals,
distorting investment risk and encouraging ever
greater inflows of short-term foreign investment.
This investment appears oblivious to the fact that
economic growth and improved credit fundamentals
remain extremely vulnerable to lira depreciation
and rising interest rates.
History
lesson for neophyte investors Turkey has a
long history of economic booms followed by
spectacular economic crashes. Very strong economic
growth in the early 1990s ended when Turkey's
economy contracted by 6% in 1994. Strong growth
returned to Turkey until 1999, when the economy
shrank by 6% again. The economy rebounded in 2000,
only to fall into a recession that produced
economic contraction of
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