Mustafa SÖNMEZ – Hürriyet Daily News/March 30/2015

The Justice and Development Party (AKP) government, which targeted 4 percent growth in its program for the 2015, has not had a very positive start. Estimates show that the first quarter’s growth rate did not exceed the growth rate of the first quarter of 2014 – in other words there has been a “zero growth.”

In a note prepared by Bahçeşehir University’s Center for Economic and Social Research (Betam), it was stated that “There was no growth in the first quarter compared to the previous year,” and overall growth for 2015 is estimated at 0 percent. The Central Bank has also implicitly agreed with this outlook.

“Zero growth,” especially in an election year, for an administration that has a growth target of 4 percent, is no small matter. Despite all the support from public expenditure, the government is not able to enter the June 7 election period amid a lively economic conjuncture. In particular, the global economic outlook does not allow the government to show a lively, vivid, satisfactory economic picture to the voter before the election.

The first quarter of the year was like this; but will it change in the second quarter? We will have to wait and see whether the budget channels will be opened and populist economic policies implemented by the government, despite the likely deficits. For subsequent quarters this year, however, there are currently no positive signals related to growth.

Betam forecasts this for the rest of the year: “We do not expect a significant recovery in domestic demand in 2015. If European Central Bank policies are influential on European demand, then a limited recovery in foreign demand may be observed toward the end of the year. However, generally we foresee that in 2015 growth will remain quite weak.”

Growth in 2014?

While forecasts are being made for 2015, the Turkish Statistical Institute (TÜİK) is set to disclose the growth data for the last quarter of 2014 on March 31, thus rounding off the overall 2014 picture. In the first three quarters of 2014, Turkey’s growth rate was 4.8 percent, 2.5 percent and 1.8 percent respectively. The last quarter is estimated to have had a growth rate of 1.5 percent, based on the industrial production index and foreign trade data.

Industrial production was not satisfactory in the October-December period. While the appreciation in the value of the dollar was expected to motivate exports and spark growth, this did not quite happen. Both the stagnation in the EU, which remains Turkey’s biggest market, as well as the rapid devaluation of the euro against the dollar, prevented Turkish exports from being directed to EU markets. The Middle East market, on the other hand, because of the negative effect of falling oil prices on demand, also could not become a focus for exporters. As a result, there has been no increase in exports; in fact, there is a slight decrease. If the growth rate of the last quarter of 2014 is indeed 1.5 percent as estimated, then this mark the most unsuccessful growth of a quarter since the last quarter of 2012, which saw 1.3 percent growth.

If the last quarter’s growth was 1.5 percent, then the growth rate for 2014 as a whole would be 2.6 percent, barring any revisions on previous quarters by TÜİK.

Is this a low growth period?

When we enlarge the picture, we can see that Turkey entered a low growth period starting in 2012. After the downsizing experienced in 2008 and 2009, the average 9 percent growth rates of 2010 and 2011 could not be everlasting. The perception given to the world of “miracle growth” was misleading. Annual growth dropped to 2.1 percent in 2012 and it was barely 4 percent in 2013. In 2014 it is estimated to be lower than the target, at around 2.6 percent. In 2015, the first quarter has shown zero growth.

It therefore seems that the thesis of Turkey entering a low growth phase is proving to be correct. No doubt, when this thesis first emerged, people reviewed where the wind of growth in Turkey’s economy came from, how it increased, how it decreased, and the key variable. That key variable was external resources and the international capital flow.

More than anything else, growth means the need for capital. If a country’s domestic savings are adequate for growth, then no problem. However, when domestic savings are not adequate for the desired growth, then it becomes necessary to use external savings with their interest rates, or to woo these external savings by calling on people to invest. There are countries in the world that are able to continue growing based on their own savings, but they are in the minority. Those countries that need the savings of others, those that cannot grow without the capital flow of those international savings, are the majority, with Turkey among them.

2001 and after

Just by looking at Turkey’s 2001 financial crisis and after, the relationship between capital flow and growth can be seen directly. Before 2002, foreign capital flows to Turkey were limited. Foreigners were not interested in Turkey’s economy. Under the circumstances of that day, there were many other market alternatives.

Solving certain problems that kept foreigners away from Turkey took place amid the 2001 crisis and afterward. As a result of the 2001 “reforms” that curbed vulnerabilities – such as the major bottlenecks in the banking system and especially the endless public deficits – Turkey became a country where foreigners would want to invest. Reports from the IMF and international ratings agencies all approved this. What’s more, the effect of the abundance of liquidity in the world also reinforced the flow to Turkey. The AKP’s coming to power as one party, and its being in harmony with the IMF programs, also had an effect on the flow of foreign resources. Starting in 2003, Turkey therefore experienced an unprecedented flow of foreign resources.

Growth, crisis, growth, shrinkage

The growth venture of the AKP era, starting after the 2001 crisis, consists of four sub-periods depending on the foreign capital flow. In the 2003-2007 period, foreign investments had extraordinary dimensions. With this foreign resource flow, annual national income grew by an average of 7 percent.

However, this growth was oriented toward the domestic market, especially construction. When growth was domestically focused, the urge to earn foreign currency came second and growth was sustained with the forex deficit, in other words with current account deficit. This was so much the case that, within a short period of time, the ratio of the current account deficit to national income had gone up to 7 to 8 percent. This had become an unsustainable current account deficit, and the foreign debt burden rapidly grew. By the time we got to 2014, Turkey’s foreign debt stock of $400 billion was slightly over half the national income.

This growth – even though it neglected industry, especially the exporting industry – gained voters for the AKP, and as these voters grew politically stronger the party did not start looking for a different paradigm.

The 2008-2009 crisis period came after the first growth period and was a reflection of the global crisis, which hit Turkey badly in the short term. The contraction in 2009 was nearing 6 percent. However, especially because the public financing was strong and effectively used, the crisis was manageable and those foreign investors who withdrew were able to be attracted again. As a result, an average of 9 percent growth was experienced in the next two years, 2010 and 2011.

Decline years

The growth of 2010 and 2011 was again construction- and domestic market-focused, it rapidly increased the current account deficit and fragility, and 2012 became a “cooling” year. The year 2012 closed below the 3 percent growth target, at 2.1 percent. However, in the following years, a high growth rate was not able to be reached again because there was a change in the financial climate across the world.

In mid-2013, the U.S. Federal Reserve announced that it would halt its support for shares, followed by increases in interest rates, thus leaving those using loose monetary policies to adopt tight ones. This announcement heralded global funds steering toward the U.S., and this was indeed what happened.

A rapid withdrawal of capital was experienced from emerging countries, including Turkey. Local currencies and the Turkish Lira lost value against the dollar.

This, together with the rising political risks that climbed with the corruption operations of Dec. 17 and 25, 2013, as well as the geopolitical risks with the unrest roiling the Middle East, was experienced more intensely in our country. The interest rates that were increased to curb the climb in the dollar’s value hit domestic demand, making low growth inevitable. As a result, Turkey’s economic growth – which barely made it to 4 percent in 2013 – dropped to 2.6 percent in 2014. This period of low growth seems to be continuing in 2015 too. At least that’s what first quarter data indicates.

Written by Mustafa Sönmez