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MEHMET ÖĞÜTÇÜ

MEHMET ÖĞÜTÇÜ >Any optimism in the Chinese ‘Rooster Year?’

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LONDON - As the world is preparing to leave 2016 behind as a year fraught with political surprises, financial crises and market volatility, governments and businesses including those in Turkey have started to set their eyes on what the next 12 months have in store for them politically and economically. 

Clearly, global risks are more elevated and more interconnected than we have ever seen before and demand a proactive and integrated response to address potential impacts. To refresh your memory, since the end of the Bretton Woods order in the 1970s, there have been serious financial crises every seven years over the past 40 years: 1987, 1997, 2007.  If you ask me whether the global crisis which has been brewing in the last few years could erupt in 2017, my answer would be yes. 

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Let me reflect on some serious risks and challenges that we are likely to encounter in the Chinese “Year of the Rooster”:

- U.S. President-elect Donald Trump’s policy priorities, management style, controversial team and “America First” approach will affect us all one way or another. He says he will encourage U.S. growth, but his rhetoric of revisiting the Trans-Atlantic and Pacific Trade and Investment Partnership talks and NAFTA, as well as his views on climate change, are worrying. If his words turn into deeds and trade wars with China occur, protectionist trends will rise as a result, leading to a further shrinking of world trade, investment volume and the global economy. Turning back the clock on trade will only deepen and prolong the world economy’s current doldrums. Unfortunately, when the $18.5 trillion U.S. economy coughs, we all become infected.

 There are estimates that U.S. bonds and stocks are overvalued at 80 percent more than they should be. Investors are sailing on the Titanic, which may cause a $68 trillion collapse in the market. 

- With national elections set for France, Germany and the Netherlands in 2017, each of which feature a far-right candidate, there is potential for economically damaging protectionist policies in the eurozone. With Italy’s “no” vote on political reforms and more than $10 trillion in outstanding public debt, the risk of further heightened eurozone instability is cause for elevated concern. Everyone, except EU leaders, understands that leaving Greece to its own devises would be smarter for the health of the Greek economy and the EU itself.

 Following the announcement that Brexit will start in March 2017, the sterling has dropped to its lowest level in 186 years. The longer the saga continues, the longer the associated uncertainty will be priced into equities and currencies, dampening corporate investment and damaging the European economy as a whole.

- Emerging market economies continue to struggle with the mix of low commodity prices, high debt levels, stronger U.S. dollar (which causes stress on those with dollar-denominated debt), and threats of trade disruption. The Fed’s long-awaited high interest rates could also lead to the stumbling of many dynamic economies as borrowing becomes expensive. This year, it will not be easy to repay private sector foreign debts for many countries, which rely on foreign borrowing for financing major infrastructure and greenfield projects.

- Despite all its misgivings, China still appears to be keeping the house upright. While the West tightens, it hopes China will continue its fiscal policy splurge, fueled by a desire to keep economic growth at politically acceptable levels (that is, above the “new normal” of 7 percent) ahead of the 19th National Congress next year. Its economy will have to continue injecting fresh funds into the market and disperse around $90 billion to 100 billion annually for the “One Belt, One Road” projects aimed at creating an economic corridor to Europe.

- Having already annihilated economic growth in Brazil, Russia, Nigeria and other previously considered rising star economies this year, commodity prices will only see a modest recovery in 2017. While emerging Asia and, particularly, India have appeared largely resilient, sub-Saharan Africa, South America, the CIS region and the Middle East will not fare so well. We will feel the price effects (progressively toward $60 per barrel) of the decision to cut down oil production by OPEC and non-OPEC countries. There will not be a considerable increase in energy demand due to economic growth slowdown in almost every country and supply surplus should only be balanced starting from 2018.

- It goes without saying that 2017 will be yet another wild geopolitical ride with wars, widespread terrorism, cyberattacks, infectious diseases, hunger, access to energy and clean water staying as other serious challenges. The Middle East is not the only place where people are taking flight. Large-scale involuntary migration is atop the list of top global risks of the highest concern for the next 12 months. More than 60 million people were displaced around the world and more will join this list of unfortunates in 2017. 
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So with all of that, Turkey’s own growing economic, political and geopolitical risks might get even worse given that it depends so much on external trade, investment, technology, energy and financial flows. Two of the top three agencies watched by investors around the world – Standard and Poor’s and Moody’s – have already cut Turkey’s sovereign credit rating to non-investment grades. Downgraded ratings especially sway the movement of “hot money” or short-term investments. Pension funds, in particular, heed closely the assessments of credit rating agencies, pulling out from countries downgraded. 

The flight of foreign capital was also followed by the Turkish Lira tumbling against the dollar. Given the country’s bulky external debt stock and the significant share of short-term debt it includes, the appreciation of the dollar on such a scale is not something the Turkish economy can easily digest, despite its strong resilience to date. Rising geopolitical risks are an important factor driving the decline in domestic demand, the backbone of economic growth. 

Turkey’s interventions in Syria and Iraq, Kurdish separatist ambitions as well as a series of deadly attacks inside the country have painted the picture of a country at war, deterring both foreign tourists and investors. 
In view of heightened risks in the coming period, what Turkey needs is a fresh beginning in economic, political and geopolitical governance to ease and better manage these challenges while at the same time pursuing a sustainable, internationally competitive and private sector-led investment and growth program. 

A positive, realistic, and forward-looking vision, embraced by large segments of the Turkish society and international community, and executed by a competent and credible team, is urgently needed without further delay.

December/26/2016

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