THE TURKISH ECONOMY – HOW SKILFUL IS THE PILOT?

 

PM Tayyip Erdogan advised Turkish businessmen about the national economy, “Have no fear, even though there may be some turbulence, the pilot is skilful.” Indeed, even though no one had much confidence in his skill in the economy, any more than his experience in diplomacy, PM Erdogan has done really good things in both fields evoking a remark from one of his sceptics like this publication, “the wrong people are doing the right things.” This remark is not restricted to the present government’s shrewd policies about EU accession, Cyprus and other fields of foreign policy and security arrangements such as steering clear of the Iraq war, terrorism or activism in the Caucasus under Washington’s guidance, as well as refusing to allow American bases in this country, but concerns also almost all aspects of the Turkish economy bedevilled by a heavy debt burden. For the prospects and challenges facing the Turkish economy please see the article below.

 

Seeing a single figure inflation rate was an unbelievable dream for the Turks for over three decades, but this has finally been achieved along with a number of other healthy developments promising a better future for the Turkish economy. The yearly inflation rate at the end of May was 8.88% for retail prices and 9.65% for wholesale, coming down from 26.4% and 32.6% respectively in January 2003. The budget objective for 2004 being 12% for both, the Government has already more than achieved this target and a similar trend is observed in most fields.

PM Erdogan told American businessmen during his official visit to the United States last January that his government had four main objectives for the economy:

1)     An economic growth rate of over 5% a year, 2) a 6.5% (of the GDP) surplus in the budget excluding interest payments, 3) single figure inflation and 4) boosting investments and foreign capital.

Economic objectives are being achieved despite external hurdles in the way

It seems it is so far so good for the Prime Minister as all these objectives are on the path of realisation.

In the economic growth field, the actualisation last year was 5.9% and the 5% objective for 2004 will certainly be a reality at the end of the year as far as the indicators of the first five months go. This assurance is based on the fact that the industrial sector is achieving growth far above the plan objectives and it is mostly due to massive export increases to the tune of 30-35% that enabled Turkey to make even more massive machinery imports last year, a performance which has been equalled in the first months of 2004. Thanks to these imports the Turkish automotive industry has boomed in the recent 2-3 years even overtaking the textile and clothing sector which had always been number one in the Turkish economy. In 2003, industrial output scored 9.1% growth as against the 6.5% program objective. This year again automotive industry imports and enhanced productivity accounted for the industrial boom in output and exports.    

PM Erdogan explained to American businessmen in the United States that they had revised the foreign capital act and simplified the formalities for foreign capital arrivals. Instead of applying to 19 different authorities for a foreign capital licence under the previous law, three agencies would now issue a licence in one day, he stressed.

Economy Minister Babacan said that in the previous 50 years, 6600 foreign companies were set up in Turkey. After the amendment of the foreign capital act last year, however, more than 1000 foreign companies had been founded within six months. Is the young economy minister being a bit hasty in his rather rash expectation of an influx of foreign capital into Turkey, is another question. Hitherto neither foreign capital arrivals nor the privatisation activities of the Government have been any help to the successful economic performance. In all earnest it should be admitted, however, that both these failures (foreign capital and privatisation) have not been the Government’s fault, but that they are mostly due to other reasons. It is obvious that huge sums change hands under the counter to obstruct economic performance especially when it concerns Turkey’s cooperation with its big northern neighbour, the Russian Federation.

A recent case in point is the privatisation of TUPRAS, the oil refineries corporation, which is the biggest economic enterprise of Turkey. The Government successfully sold 65% of TUPRAS’s shares to a Tartar (Russian) and Turkish (Zorlu Holding) partnership for $1.3 billion cash payment, but after a Disinformation-Mechanism guided campaign in the media against this deal, a relatively small court hurriedly cancelled it twice, first for a suspension which was quashed by the higher court and then on substance which may again be quashed by Danistay, the highest administrative court. The Prime Minister accuses bureaucratic barriers and fanatics for this evidently unfair practice, but judging it by the press campaign it was a super power finger rather than anything else. Certainly the mechanisms of the Turkish justice will operate and put it right in the end, but all these cause untold difficulties and a waste of time and resources.

Budget surplus is a stunning success

The prime minister’s economic target of 6.5% surplus in the budget performance excluding the debt repayments promises to be a stunning achievement especially this year. This ambitious rate of 6.5% surplus was, by and large, achieved last year and scored an impressive success in the first months of this year.

According to the budget returns in the first four months, there was a TL9.832 quadrillion surplus in the budget performance excluding debt repayments. This nearly TL10 quadrillion surplus accounted for 49% of the total of TL20.214 quadrillion (6.5% of the GDP) foreseen for the whole year. In other words, nearly half of the target was actualised in the January-April period.

Instrumental in this phenomenal achievement was the Government’s reluctant decision under IMF pressure to cut down the budget appropriations by 13% or TL4.550 quadrillion last March. This decision was taken when it was seen that in the first two months the budget expenditure rose by 13.4% as against the 4.2% increase in the budget revenue  

This point, i.e. the 6.5% surplus excluding debt repayments considerably undermines the Government’s investment program and annoys the ruling power greatly. Indeed, public sector investment in the 2004 budget was originally 2.5% of the total and even this skinny rate went down further to 1.6% after the budget cuts.

That is why this unpopular 6.5% surplus compulsion will be one of the main issues in the Government’s decision to continue with the 3-year IMF program when it expires in February 2005. The Government is exceedingly reluctant to renew the standby agreement with the IMF for all these reasons and financially it can afford it, but it is equally reluctant to fall into the position of clashing with the IMF. It is planning to renew the standby agreement without requiring any financial assistance from the Fund as from 2005 other than some debt repayment facilities as it seems impossible for Turkey to have the PPM (Post program monitoring) treatment after February 2005 because its debts to the IMF far exceed its IMF quota. PM Erdogan told Milliyet (3) “We will have consultations with the IMF and then consider at the Council of Ministers in July what kind of a relationship we will have with the Fund as from February 2005…I disapprove of the outlooks that we will excel if we go along with the IMF or sink if we deviate from it. We will negotiate to find the best way. Why? Because we are in debt to it. We have reduced it, but still we owe the IMF $20 billion…We will take a decision about which one of the three paths we will take in our future relationship with the IMF. Let me speak out, we want to cease to be an outright debtor.  In fact the interest rates of IMF loans are low, but the sum that comes from that source is peanuts. Besides it takes a long time to get money from that source…They raise in instalments 300, 400, 500 million dollars, or one billion dollars at the most and each time they come and monitor, draw reports. The finance market is locked into these talks and reports and is turned upside down for days each time. We have to eliminate it.”  

About the $8.5 billion American loan which Turkey declines to receive because it has  political strings about Turkey’s keeping out of northern Iraq PM Erdogan says, “When we discussed this loan in Dubai there was no such political string. When Congress discussed it and the final text came out we saw such a condition. We then told them that we would not view this loan warmly. We have never taken this $8.5 billion into our accounts in the budget. It is the USA’s problem to lift this political string.”

Ankara has to take a decision about this $8.5 billion American loan by September, but rather than a simple loan agreement it has turned into a thorny issue of political strings concerning Turkey’s basic foreign policy and national security policies. That is why the ratification of the Turkish parliament is now required for it, rather than the ratification by the Executive branch in silence and secrecy. Needless to say, with their worldwide prestige in its lowest ebb after the Iraq war, the United States stands no chance of getting an agreement ratified by the Turkish Parliament when it has strings about the American bases in Turkey or the Turkish Armed Forces’ movements to curb the PKK terrorism from northern Iraq.

Back to the economic aspects of Turkey,  it has to repay the IMF 26.3 billion between 2004 and 2008 ($5.2 bn + $7.8 bn + $10.7 bn + $1.8 bn + $0.8 bn respectively.) This sum has already been reduced to close to $20 billion as PM Erdogan notes (stands at $23 bn according to IMF representative Odd Per Brekk), but still there is a heavy debt repayment burden ahead, especially with $10.7 bn due in 2006. The $13 billion repayment for this year and next will not be much of a problem as a sizable part of this year’s $5.2 billion has already been disbursed. The current talks with the IMF in Ankara concern reducing the $10.7 bn due in 2006 to $7.3 bn  and spreading the rest over the next two years. It seems it will be possible to work out such an agreement as the IMF is keen on keeping the Standby agreement going on with Turkey for the next 2-3 years, instead of the softer term PPM or precautionary standby.                

Debt stock decline in ratio, fluctuate in amount according to exchange rates

The rate to the GDP of Turkey’s debt stock has been reduced from 91% in 2001 to 71% and the rate of external debts from 32% to 22%. The target is to reduce the debt stock to 60% (the EU’s tolerable rate) by 2007 and to 50% in 2008. “Brazil’s debt stock rate is 50-55%, about 20 points less than ours, yet Brazil pays higher interest rates in its borrowings than we do. One has to ask oneself why is it,” demands Economy Minister Babacan in his boasting of the Turkish Government’s high credibility in world finance markets.

But even though the debt rates to the GDP come down, the debt amounts keep going up mostly due to inflation. At the end of 2003, the gross debt stock of Turkey was TL194.4 quadrillion domestic and TL88.2 quadrillion external debts – up by TL45 quadrillion on a year before. Babacan explains:

“Domestic debts increased by 29.6% in 2003. Taking the 20% inflation rate off it leaves behind 9.6% which includes high interest rate borrowings in the first quarter of 2003 due to the Iraq war. Also there are the burdens of the bankrupt banks like Imar bank. They increased the burden by TL7.9 quadrillion. If it had not been for this burden of bankrupt banks the debt stock would have been 68.5% instead of 70.7% at the end of 2003. The Imar Bank contributed to this burden by 2.2%. We want to reduce our debt stock below 60% in 2007. Our projections show that we will be able to attain this goal. This is also the EU’s Maastricht criteria. We have to follow this policy without concessions. That is the key.”  

One of the main reasons for the government’s success in the economic performance is its achievement in lowering interest rates. The Prime Minister says that they reduced the compound interest rates from nearly 70% to 20 odd per cent within the year and a half they have been in power. Indeed, it came as low down as 22%, but again went up to above 30% when the appreciation of the TL in its dollar parity was reversed in recent weeks. Today the compound interest rates stand at 27% and the dollar parity at about TL1.5 million.

Thanks to this decline in the interest rates the borrowing cost in the 2004 Budget will go down from TL66 quadrillion to below TL61 quadrillion and this TL5 quadrillion saving is a great relaxation for the budget performance this year. The interest rate average for the year is 29% in the 2004 Budget and the actualisation was 24-25% in January. It is certain that the actualisation for the entire year will be much lower than that. Last year the Budget saved up TL7 quadrillion thanks to lowered compound interest rates.

Turkey’s total external debts at the end of last year was $147.2 billion and $70.3 bn of it belongs to the public sector, the rest being company debts. The external debts are in the US dollar by 45%, in Euro by 31%, in Japanese Yen by 5% and the rest is in the IMF’s virtual money, SDR (Special Drawing Rights.) Daily parity changes among these currencies and the TL make it impossible to make reliable projections and calculations about these debt figures.

The current account deficit rises along with import increases

The biggest catch in Turkey’s economic performance is the widening gap in the current accounts mostly because of soaring imports, even though the exports performance is very heartening. The objective for 2004 exports has been upgraded to 56 billion in view of the $5 billion monthly averages in recent months. Exports totalled $24.035 billion in the first five months.

Despite this achievement, however, the current accounts are suffering a widening gap because imports rise faster than growing exports. In the first quarter imports amounted to $20.2 billion with a 40.7% increase, as against $13.004 billion exports with a 25.5% increase on a year before. This import total heading for $80 billion for the year may cause serious problems for the economy, but the Government does not share pessimistic forecasts that the financial crises of November 2000 and February 2001 may recur. They stress that these soaring imports are mostly for sophisticated investment goods which enable Turkey to increase its industrial exports. Also the record level of tourism income is helping Turkey, they underline.

The Holland Bank, ABN Amro has forecast in a survey on the Turkish economy that EU accession will make a miraculous impact on the Turkish economy. Even the mere announcement in December of the negotiations for full membership will yield remarkable results on foreign capital inflow and its healthy affects on the Turkish economy, reports the Dutch bank analysis. uras@ada.net.tr – June 7^th, 2004