MUSTAFA SÖNMEZ Hürriyet Daily News September/07/2013

Five years after the global economic crisis, global capitalism is in a new place. Central countries faced the crises under different conditions and a separation also occurred. It is possible to say similar things for peripheral countries. Countries in Asia, Central and Eastern Europe, South America and Southern Africa, which have been added to the center as suppliers of raw material, energy and durable and non-durable industrial products, all are affected by the global crisis as their export markets shrank and the capital flow-outflow weakened. A part of peripheral countries went through the crisis with an exchange surplus, which means a current account surplus, while another part of them went through it with a current account deficit. The ones with a current account surplus turned the big crisis into an opportunity. BRIC countries – Brazil, Russia, India and China – formed a new polar in global policy and used their own domestic markets in order not to lessen the growth pace.

A group of peripheral countries, including Turkey and South Africa, were caught by the crisis as they had a large current account deficit. They were able to draw on the capital and work wheels thanks to their disciplined finance and controlled banking systems. However, this capital inflow exacerbated the problems with spending (growth based on construction and privatization-funded foreign credit) that worsened the current account deficit and raised the debt burden. So, the growth in the periphery during the global crisis is divided into two: Those that grew without a current account deficit and those that grew with a current deficit. This situation showed its effects during the turbulence that began in May and continued in August.

Since Federal Reserve President Ben Bernanke’s signal on monetary policy tightening started to be announced more loudly in May, short-term capital or hot money in peripheral countries began to flow out. This caused local currencies to lose value fast. The currencies of Brasil and India lost around 20 percent of their value, the Turkish Lira’s value loss approached 12 percent and the value of 1 dollar surpassed 2 liras, despite dollar sales from all interest and reserves.

The countries whose risks have risen

Credit default swap (CDS) enables the comparison of countries’ risk premiums, and Turkey has the most important risk jump when comparing risk premium averages between May and August.

It is dramatic that Turkey’s risk premiums rose by 104 points in these four months. Turkey’s 2011 current account deficit as a share of the national income ratio was 10 percent and was only able to be reduced to 6.5 percent in 2012, growing 2 percent since then. Turkey is therefore the most vulnerable “emerging country,” according to investors. Important erosion has also happened in Turkey’s “country image,” which happened as a result of police responding to the Gezi protests with violence and a marked diplomatic coldness with the United States and the European Union.

South Africa is following Turkey in vulnerability. Its country’s risk premium also rose in these four months and its current account deficit is close to Turkey’s. India, whose rupee has lost 20 percent of its value in the last four months, is another big emerging country that has attracted attention as a BRIC member, with a relatively high current account deficit. However, India’s risk premium has not risen, but actually decreased by 3 points.

Foreign debt burden

Turkey ranks first in vulnerability regarding the emerging countries’ foreign debt stock, foreign debt, and current account deficit. Turkey’s foreign debt stock reached $350 billion by the end of March 2013. It is currently not below $365 billion. This means that Turkey’s foreign debt stock is equal, with 41 or 42 percent of its national income made up of foreign debt stock. Two-thirds of this debt belongs to the private sector and one third is short-term debt.

What might happen?

Which peripheral countries will join in the growth trend by passing from the crisis to growth, and which will not? This is a popular question. One of the largest peripheral countries, Poland, is the back garden of Germany, as Mexico is the back garden of the United States. They will only be able to move forward dependant on these central countries’ growth locomotives.

Brazil, as a country that passed through an explosion similar to the Gezi protests at the same time, did not lose credit in its country image as much as Turkey. Its risk premiums even rose, and its current account deficit is at a reasonable level. It is preparing to intervene in its domestic currency’s loss of value, which reached 22 percent between May and August. If the center exits from the crisis, China and India will join (the growth trend) in the framework of their old work sharing, but along with new powers acquired.

The countries that will have adaptation problems and have to shrink instead of growing are listed as Turkey, South Africa, India and Indonesia. Among them, Turkey needs an inflow of new resources again in order to grow. Its foreign debt stock that will have to be paid in the next 12 months is $165 billion and its current account deficit to be financed is around $60 billion. As the finding of this $225 billion inflow of foreign resources is a subject of curiosity, different ways to provide a new exchange inflow of foreign exchange are being researched. It is apparent that Turkey will have to revise its growth rate target, currently at 4 percent, by reducing it 1 or 2 points.

Box:

Central Bank governor’s 1.92 lira claim

When the Turkish Lira fell to 2 liras against the dollar on Aug. 27, which means passing a considerable psychological limit, Central Bank Governor Erdem Başçı made the most dramatic step in his career by telling Anadolu Agency that they would keep it at 1.92 liras by year-end. The realization of this claim depends on a decrease in the foreign exchange demand, and it requires an inflow of exchange. But how? The way is to lure undeclared exchange savings to Turkey.

The cash repatriation law came into effect on May 29 and determined three months for applications. The deadline has been extended and applications will be received until October. If the one who has exchange, gold and stocks abroad brings them to Turkey, their assets will be acquitted and they will pay only 2 percent tax in return. Şükrü Kızılot, a columnist from daily Hürriyet, seriously defended this formula in his Sept. 1 column. He said the exchange that will possibly come from abroad via this law will be worth around $25-30 billion, leading to a fall to 1.92 liras to the dollar.

While the previous cash repatriation law that came into effect four years ago included assets coming from the country and abroad, the new one only includes only assets from abroad. However, as the previous law didn’t allow the inflow of assets from Swiss banks that don’t have information exchange, the new law gives a green light to the inflow of assets from Switzerland and other tax haven countries. The formula is as follows: “If you bring your illicit exchange money, we will forgive your tax penalty.”