PULSE of TURKEY No 59.................THURSDAY, OCTOBER 8^th 1998

TURKEY UPDATES PROGRAM DUE TO GLOBAL CRISIS

The first three quarters of Turkey’s 3-year stability program have been most successful, but the global financial crisis still forces Ankara to revise it. Güneş Taner strives to keep changes to the minimum and only as from 1999. If Turkey can honour its foreign investment commitments against the exodus of hot money and go on within the free market economy until the end of 1999 the latest, the money is bound to return at much better terms. Hot money leaving the emerging markets cannot possibly stay for long tied to American 30-year Treasury bonds at 3-4% interest. Ankara is determined to win this marathon with or without G-7’s help. Cooperation with Russia is part of the game.

After the budgetary performance which still conforms to the quarterly financial programs despite signs of exhaustion (Issue No:54), the inflation targets have not deviated greatly from the program either.

The inflation figures just revealed for September were a shock with a 6.7% increase in consumer and 5.3% in wholesale prices. Despite these unexpectedly high price increases in one month, on a yearly basis consumer prices fell by one point from 81.4% in August to 80.4% in September and wholesale prices fell by one-and-a-half points from 67.4% to 65.9%.

This drop, in both consumer and wholesale prices, is certain to continue in October and the following two months too because the October, November and December inflation rates in 1997 were very high. This year’s figures, even though they may be relatively high and certainly higher than the financial program, are still an improvement on a year before.

In October 1997 consumer prices rose by 8.3% and wholesale by 6.7%. In November they were 6.6% and 5.5% and in December 5.1% and 5.4%, respectively.

Therefore, if the October, November and December 1998 figures are lower, say 4% each for consumer and wholesale prices for each of the following three months, the yearly inflation rates at the end of October will fall to 76.1% for consumer prices and to 63.2% for wholesale. In November they will be 73.5% and 61.6% and in December 72.4% and 60.2%, respectively. It is very likely that the monthly inflation rates will be lower than 4% in the last quarter of this year. These figures will further improve and may well come closer to the 50% target for wholesale prices at the end of the year.

Wholesale prices being the basis in IMF calculations, we can confidently say that at the end of the year the inflation rate will be below today’s 65.9%. How much below remains to be seen, but it seems that the Government’s target of 50% will be difficult to come by. Somewhere in the 50s, upper 50s would not be an unrealistic estimate for wholesale prices and 10 or 15 points more for consumer prices. The Government is also aware of this and tends to increase the deflator (the average inflation rate for the year) from 64% in the financial program to 70% and that is the main revision of the 3-year program’s first year, 1998.

Güneş Taner is still adamant about 50% this year

That is not what the State Minister for the Economy, Güneş Taner, thinks or rather prefers to say for psychological reasons. His estimates are more optimistic and he still hopes that they will be able to live up to the 50% objective. He says that they may have to revise the economic parcel’s objectives in view of the ill effects of the global financial crisis, but this revision will be made for the targets of next year, rather than this year’s.

Taner agrees that the September inflation figures were higher than he had expected, but that they will not continue in the following months. Taner said to Hürriyet (6^th) in Washington during the IMF and World Bank conferences last week:

“There is no change in our year-end target of 50% inflation for this year. Despite all hardships we have not resorted to an additional budget and we never will. We are persistent about our targets and will strive to attain them, but due to the global crisis we are living through there may be a slight increase in the 20% inflation rate target for 1999.”

Reminded that most observers were not of the same opinion about the economic performance, he said, “There is a difference between creating work and criticizing it. Those who now claim that the inflation rate will be 64-65% at the end of the year are the ones who forecast at the beginning that the inflation rate would be 75% this year. We have already achieved a rate of 65%.

The same critics were saying last year that in September the Treasury would not be able to find loans or finances. Here we are. September is behind us. The Treasury has no problem in October, November and December. Consequently, we are expecting the interest rates to take a course of going down as from this month. And we believe that despite all the unconstructive effects in the world we will be able to live up to our target of a 50% inflation rate.”

Taner said about the global crisis that no one could see ahead at the moment. “The first step is to stop the bleeding in Brazil after the elections there. Secondly, similar aid should be extended to Asia. The third is for G-7 to support the IMF and the World Bank in order to stabilize the crisis. We are familiar with what falling off a roof is like as we have fallen off a few times and are not going to repeat it again.”

Taner said that in spite of everything, Turkey needed external resources for its economy and failing to receive sufficient loans from outside they could be forced to revise the 1999 program. “The close monitoring system that we are enforcing in our economic performance is a very powerful assurance for our economy,” he stressed.

The Washington talks with the IMF and World Bank last week provided an opportunity to the Turkish delegation to have consultations with the IMF about how much to revise the close monitoring program’s targets. Increasing the inflation rate from 20% to 35% in 1999 was the key point in this revision. All the other targets of the 3-year economic stability program will be changed accordingly, once the inflation rate target is raised. In fact, only the first two years of this 3-year program comes within the IMF supervision.

This year’s program will be implemented as loyally as possible now that the last quarter has started with some difficulties. The 1999 part of the program will be revised in agreement with the IMF. The revisions are not final, but 4.4% economic growth rate may be reduced to 3%. The year-end inflation target may be revised from 20% to 35%, the deflator from 32% to 45%, the Budget expenditure from TL20.3 quadrillion to 21-22 quadrillion, and the Budget deficit from TL4.1 quadrillion to TL4.5-5 quadrillion.

An IMF team will come to Turkey on October 14^th to discuss the details of these revisions. One thing is certain that world economy and finance quarters were surprised at the Washington and New York consultations of the Turkish delegation about how successful Turkey has been in implementing the close monitoring system in 1998, the year of an unprecedented global financial crisis. Turkey’s credibility ratings may go up as a result, but everything depends on the forthcoming consultations with the IMF team in Ankara.

Despite this optimism, Turkey’s efforts to find external loans for smooth passage into a more stable economy do not seem to be easy. The consultations in America last week showed that international finance authorities still view the end result with certain suspicion.

PM Mesut Yılmaz tried to persuade world finance authorities in New York to upgrade Turkey’s position in the world by classifying it higher than an “emerging economy,” but it did not succeed. It seems that there will be no change in world economic circles’ outlook towards Turkey before the April 1999 elections, the reason being more political than economic.

The impact of the global crisis was on credit management in Turkey

The main feature of the Close Monitoring Program of Turkey was to make the economy totally transparent under the IMF’s close scrutiny and obtain loans from abroad. This way the domestic borrowing needs of the Treasury would be reduced and along with it the interest payment burden would be lowered.

This system worked very well in the first two quarters of the program and interest rates went down from 130-140% to 70-75%.

Unfortunately, along with the current global financial crisis the situation was reversed in the third quarter. Instead of financing domestic debt servicing with external funds, domestic borrowing began to finance the unexpected exodus of foreign capital from Turkey. It resulted in compound interest rates going back up to 130-140% and problems in the budgetary performance. On October 6^th when the compound interest rate went up to 144% the Treasury stopped a TL100 trillion 7-month bond sale at TL80.1 trillion which corresponded to TL47.9 trillion net income. As the Treasury had sold TL952.6 trillion bonds corresponding to TL670 trillion net income at 137.89% interest rate on September 29^th it could afford to take such a step in order to prevent unleashed increases in interest rates.

Despite these difficulties and rising interest rates the Government has so far been able to stick to the economic parcel and may well close the year with small deviations from the targets.

Explaining the impact of the global crisis on the Turkish economy, the Governor of Garanti Bank, Akın Öngör, told Yeni Yüzyıl (5^th),”We are learning from the continuing crisis. Turkey could not possibly have remained outside the crisis. Above all, those who manage the big mutual and hedge funds worldwide and the banks look at emerging markets as a parcel. As they have lost a lot of money in the crisis stricken countries they tend to quit emerging markets.

The second impact is that there will be a small, if any, flow of capital from the developed countries to the developing ones in future. It will decline. If the flow was 100 it will now be 20. Turkey’s share will also decline. The upheavals in the emerging markets will also adversely affect Turkey’s exports and trade. The most important example is Russia. We are expecting a decline in Turkey’s official exports to Russia. These are the negative impacts of the crisis.

Turkey will boomerang ill effects of global crisis with Aikido

As for the good ones, Turkey will not enter into a crisis if it can manage the crisis well, and so far so good. The reason for the prevention of the crisis is that there has not been a heavy western capital investment in Turkey so far. Of the existing foreign investments 5 (billion dollars) have already gone. Only $1-1.5 billion remains. It will not be the end for Turkey if this also leaves. If this capital had been $50-60 billion Turkey would have burned out. The crisis has now turned into an advantage for Turkey as long as our rulers do not make some basic mistakes. So far they have not made such mistakes. What small-scale mistakes they have made they rectified. That is why I appreciate what they did. If they had persisted with the $4 billion tax burden they imposed on the finance sector with the new tax law Turkey would have entered into this crisis today. By not insisting on it, they gave the banking sector a chance to do business with the real (non-speculative) sector. It is a good development. Otherwise, we would have applied to the court. It was unjust. But without need to take recourse to the court they rectified it.”

Öngör believes that the Treasury and Central Bank managements in Turkey are good and they are working in excellent coordination. Their efficient management provides Turkey with fresh opportunities in this crisis, he says.

Turkey is bound to get back international funds because they do not have many safe places to go in the world. But this, ie the return of international capital, may take at least a year and Turkey should be able to survive within the free market system in that period. He said, “Interest rates in western economies, in the USA are very low. The money goes to 30-year treasury bonds at 3-4% interest rates. Yet the insurance companies have to make the most of the premiums which they collect and this is not possible with 3-4% interest rates. Now the money is tied up. They cannot possibly keep the money there for long. It might stay there for six months or a year, the most. They will again have to decide to place this money in emerging markets with rates of high return. There is no alternative. Their moods will change. Possibly their managers will be changed and the outgoing ones will be discreditted and the new managers will return to the emerging markets. A new bank manager needs income within 10 months. He will place money in safe markets with high interest rates. That is where Turkey will be important. If it emerges from this crisis with a good performance, it will be among the first three in the emerging economies from its present rating of say 15^th. We will then get more capital at better terms. But this will not happen within a month or two. This psychological atmosphere has to disappear first. We do not foresee it happening before at least next summer. But it is definite that such an opportunity exists for Turkey. We must use the Japanese fighting technique, Aikido. It is based on reversing the energy used against you to make you fall. İf you know Aikido well you use your rival’s energy to make him fall instead of yourself. Turkey can stage a very good performance of Aikido by using its energy well during this crisis.”

Güneş Taner is confident that Turkey will be able to carry out the above recommendation of Garanti Bank’s Governor. That is to say, by faring safely through the current stormy atmosphere in the world finance markets Turkey will receive external loans at suitable terms when the time comes. Taner told the press in Washington, “Turkey has proved that it has immunity against the global crisis. It has proved that it has not been greatly affected by the crisis. No matter what happens in the world we can comfortably get through 1999. By sacrificing the economic growth in real terms, we may concede to a lower growth rate and will get over this havoc without much problem. Don’t forget we have been through the Gulf crisis, earthquakes, floods and now the global financial crisis…Turkey is exceedingly strong in its dealings with the IMF. We achieve twice more than what they require. Turkey’s foreign exchange losses during the crisis were marginal. Look at Brazil, it lost $50-60 billion. Russia and Asian countries lost a lot of hard currency. The truth is that before we sink the other countries will have long sunk. These things will have been long resolved before we sink. We have enough fuel in the tank to drive us through the crisis.” Taner said even if China resorts to a devaluation it would not affect Turkey greatly. Asked about the IMF’s stance towards Turkey he said, “The IMF objected to the salary increases to civil servants in October. But as of the end of September we increased our budgetary revenue by 13% and cut down expenditure by 4% on the program targets. What else should we have done? No one takes these achievements into account.” He said all these achievements were amidst a global crisis. The IMF was bound to appeciate it.

Economists and President Demirel stress the importance of Russia

President Demirel and Turkish economists stress the importance of Russia in Turkey’s efforts to sail through the global crisis safely. “Wealthy Russians who used to go to other countries will now come here in bigger numbers” said Garanti Bank Governor Akın Öngör. “In my opinion, Russian tourists will not decline in Turkey. If we take appropriate measures about shuttle trading (coastal trading) it may grow bigger. If Turkey enables them to trade in Roubles, and if our banking system can find a way of using these Roubles for natural gas imports, more Russians will come here and more trade will be done from Laleli (the centre of shuttle trading).”

Güneş Taner has already suggested that a system to trade in Roubles be set up with Russia and preparations are under way for such an arrangement without falling into a barter or clearing system.

Addressing the inauguration of the Foreign Trade Week on October 5^th President Demirel emphasized the importance of increasing exports and cooperating with Russia to this end. He advised exporters and businessmen, “Globalization is the Kurtlar Sofrası (sharks’ dinner table). Don’t leave this table with an empty stomach”. He said that exports were as important for a country as its independence. Turkey had to increase its exports to $50 billion in a short time. “Otherwise, the country will have to seek loans from abroad and they will be politically motivated loans. My advice to the rulers of the country is that they should not fall into a position of seeking politically motivated loans.

Turkey should not lose its export markets. Russia has to make imports. It is out of the question that Russia will not be able to find money. We should never lose the Russian market. Also important are the European, American and Chinese markets. If the United States lifts the textile quotas our problem will be solved. That is what we are striving for.”

The 1999 Budget will come up with Parliament on October 17^th. It is prepared on the basis of the revised figures of the 3-year stability program, the highlights of which are cited above. uras@ada.net.tr, October 8^th, 1998

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