Investment incentives are fine but what about Turkey’s deficits?

Investment incentives are fine but what about Turkey’s deficits?

The government on March 28 unveiled a number of measures aimed at reducing red tape to ease doing business in Turkey.

A scheme worth 128 billion Turkish Liras ($32 billion) for strategic investments will also reportedly be announced soon. When those measures were unveiled, the lira again weakened beyond 4 to the dollar and the currency basket broke new records.

In the past, such measures aimed at boosting economic activity would cheer the markets and would be perceived as a sign of Turkey’s economic growth story. Because of this perception, Turkey would attract more foreign capital and interest and currency rates would decline.

But now the markets do not interpret such measures positively. That is because macroeconomic fundamentals have started to deteriorate and this deterioration has become the “main issue.” As a result, decisions taken to boost economic activity fail to trigger a positive response.

Markets are only likely to react positively if the authorities announce measures regarding fiscal and monetary discipline. But at present the markets think Turkey’s current account deficit and high-inflation are unsustainable. The markets fear that given the current outlook, measures aimed at spurring economic growth will result in a wider budget deficit, while a further deterioration in economic fundamentals may gather pace.

Foreign financial institutions that note that the sharp depreciation of the lira stems from concerns over the high current account deficit mention reports regarding planned investment incentives and argue that these measures will only widen the current account deficit. Both interest and currency rates will come under upward pressure, they suggest.

Can trust be restored?

Because of this perception, unlike in the past the announced measures aimed at reviving economic activity are not welcomed with much enthusiasm.

Speaking at the Coordination Board to Improve the Investment Climate meeting on March 28, Prime Minister Binali Yıldırım said the following: “We will soon announce measures aiming to increase investments and combat inflation. We will clear the path. We’ll address much-debated issues in 2018.”

Noting that the government has approved an incentives scheme worth 128 billion liras ($32.01 billion) for strategic investments, Yıldırım also said “banks have taken measures to ease markets and facilitate access to credit.” He announced a new legal package comprised of 67 articles, noting that Turkey had attracted $191 billion worth of foreign direct investment (FDI) over the past 15 years and this was the indication of trust in the country.

There is no doubt that there has been an unprecedented amount of foreign capital inflows into the country. But FDI entered the country at times when Turkey maintained fiscal and monetary discipline while simultaneously having high growth rates.

The global conjuncture was favorable, Turkey had good relations with the EU, and both the rule of law and democracy were strong. The environment of trust created in those times was therefore an important factor attracting foreign capital, further lured by macroeconomic stability and high growth rates. Turkey had a “success story” and therefore it managed to lure foreign capital.

Today, both the global and local climates are different. Can a similar climate be created again? Yes. But the methods that must be adopted to put things back on track are very different from the methods currently being chosen.

Erdal Sağlam, hdn, Opinion, Turkey