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Possible impact of the crisis on Turkey
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I wrote yesterday that I had a chance to listen to the 1999 winner of the Nobel Prize for Economics Robert A. Mundell, expert in economy politics Arvid Lukauskas, and expert in international finance and growth economics Francisco L. Rivera-Batiz during a conference titled "The Global Financial Crisis and its Possible Effects on Turkey" organized at Bahçeşehir University. I was inspired by Batiz’s speech so analyzed the reasons behind this global crisis.
Today, I will focus on its possible effects on developing countries, including Turkey.
According to the figures Batiz gave, increases in Gross National Product, or GNP, in some countries due to the crisis will be as follows (%):
200720082009
U.S.2.01.4-0.9
Japan 2.10.5-0.1
Eurozone2.6 1.0-0.6
200720082009
Iceland4.91.5-9.3
Mexico3.21.90.4
Turkey4.63.31.6
With this pessimistic tableau, Professor Batiz says the crisis was transferred, and will be transferred, to the developing markets from the United States through the ways I list below:
1) Institutions and private individuals who were credited or invested in a sunken mortgage will not be able to take their money back. So they will be negatively affected by the crisis. Russian oligarchs and banks of UBS are in the lead among them.
2) U.S. and European banks affected by the crisis and having branches, partnerships etc. in developing countries will carry the crisis into these countries.
3) Countries including Ireland and Spain that have provided U.S.-like mortgage credit are in crisis now due to declining real estate prices all over the world.
4) Since this financial crisis slows down the economy, the United States and some other rich countries will purchase fewer goods from developing countries. So the export in developing countries will decline. Good prices have already decreased. The U.S. reducing imports will face relative foreign trade deficit.
5) Risk factors attributed to countries with shrinking export and therefore economy will rise, as foreign capital will escape from them. Russia became the country facing the highest loss in value (%68.9) when the Russian stock market lost foreign capital in 2007. Turkey is ranked number two with 67.6 percent in the list of countries losing capital severely.
6) Countries having current deficits of over 5 percent of their GNPs, which is 6.6 percent in Turkey, will hardly find foreign credit.
7) Eventually, the monetary units of developing countries will face a dramatic devaluation against the U.S. dollar. With 41 percent, Turkey is the second following South Korea (48.7 percent) in the list of the countries whose monetary units lost most in 2008. What should Turkey do?
Batiz says Turkey has to strike a deal with the International Monetary Fund!
However, it should reject the practice of high interest rates and tight monetary policy impositions by the IMF due to fears of increasing inflation. Inflation is going up but the global economic recession and declining prices will curb inflation automatically. Turkey should not try to protect the YTL against U.S. dollar because that could encourage dollar purchasing from markets and pull the interest rate up and invite economic recession through a shrinkage in money supply. In summary, Turkey should, at all costs, maintain economic activities, encourage export, give value to high goods and service exports and stimulate more savings.
According to the figures Batiz gave, increases in Gross National Product, or GNP, in some countries due to the crisis will be as follows (%):
200720082009
U.S.2.01.4-0.9
Japan 2.10.5-0.1
Eurozone2.6 1.0-0.6
200720082009
Iceland4.91.5-9.3
Mexico3.21.90.4
Turkey4.63.31.6
With this pessimistic tableau, Professor Batiz says the crisis was transferred, and will be transferred, to the developing markets from the United States through the ways I list below:
1) Institutions and private individuals who were credited or invested in a sunken mortgage will not be able to take their money back. So they will be negatively affected by the crisis. Russian oligarchs and banks of UBS are in the lead among them.
2) U.S. and European banks affected by the crisis and having branches, partnerships etc. in developing countries will carry the crisis into these countries.
3) Countries including Ireland and Spain that have provided U.S.-like mortgage credit are in crisis now due to declining real estate prices all over the world.
4) Since this financial crisis slows down the economy, the United States and some other rich countries will purchase fewer goods from developing countries. So the export in developing countries will decline. Good prices have already decreased. The U.S. reducing imports will face relative foreign trade deficit.
5) Risk factors attributed to countries with shrinking export and therefore economy will rise, as foreign capital will escape from them. Russia became the country facing the highest loss in value (%68.9) when the Russian stock market lost foreign capital in 2007. Turkey is ranked number two with 67.6 percent in the list of countries losing capital severely.
6) Countries having current deficits of over 5 percent of their GNPs, which is 6.6 percent in Turkey, will hardly find foreign credit.
7) Eventually, the monetary units of developing countries will face a dramatic devaluation against the U.S. dollar. With 41 percent, Turkey is the second following South Korea (48.7 percent) in the list of the countries whose monetary units lost most in 2008. What should Turkey do?
Batiz says Turkey has to strike a deal with the International Monetary Fund!
However, it should reject the practice of high interest rates and tight monetary policy impositions by the IMF due to fears of increasing inflation. Inflation is going up but the global economic recession and declining prices will curb inflation automatically. Turkey should not try to protect the YTL against U.S. dollar because that could encourage dollar purchasing from markets and pull the interest rate up and invite economic recession through a shrinkage in money supply. In summary, Turkey should, at all costs, maintain economic activities, encourage export, give value to high goods and service exports and stimulate more savings.
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