Mr Market wishes Turkey a happy new year!
ERDEM AKTUĞThe Istanbul Stock Exchange (ISE) 100 Index finished the year 2012 with a record high, a 52.6 percent return. The major exchange traded fund (ETF) that tracks the Turkish stock market, iShares MSCI Turkey Index Fund (TUR), is also up by even a higher margin: 66 percent. Five-year credit default swaps (CDS), insurance products on government bonds, are also at all-time lows at 128 basis points. Finally, two-year Turkish government bond yields came down to about 6.8 percent. In summary, a good fiscal position, a strong banking sector and successfully executed export-oriented policies outweighed the concerns about the turmoil in the Middle East, problems in the euro area and social unrest within the country. An upgrade to investment-grade status by Fitch ratings in early November and a number of positive reports on the future of the country also contributed to a late rally on Turkish stocks and bonds.
A recent report on the Rising Economic Powers (REP: Brazil, Russia, India, China, Mexico, Indonesia and Turkey) and U.S. trade policy by the U.S. Congress also highlighted Turkey as one of the “most promising economies” for the upcoming 40 years. The report looks back at the last 32 years (1979-2011) to project how the global economy will look in 2050. The major driving force behind the projections is demographics. However, the leaders of the REP will have to note that becoming large is not the only goal; a higher standard of living proxied by gross domestic product (GDP) per capita should also be a major concern.
In general the report warns these economies to fight corruption, reform the economic and judicial systems and liberalize the markets with less government intervention. I would also add that China and Russia need more careful consideration since they exert “state capitalism” at a higher level and their populations are aging.
Speaking of Turkey, the major problem lies in the current account deficit. As “The Wealth of Nations” by Adam Smith or “Why Nations Fail” by Daron Acemoğlu and James Robinson suggest, countries with good economic and judicial systems will export more than their imports and eventually will prosper.
In 2011, the current account deficit was about 10 percent of the GDP, whereas the expectation for 2012 is about 7 percent for Turkey. It seems like the problem is under control, but a further reduction to a level below 5 percent would be ideal. The report also notes the financing of the deficit should be via longer-term capital flows or foreign direct investments rather than short-term flows. Currently, 78 percent of the deficit is financed by short-term investments, which can be considered risky.
Other areas of improvement suggested for Turkey are the barriers for foreign workers to work in the service industry, stringent labor regulations, restrictions in foreign investments, insufficient copyright protection laws and an “unorthodox monetary policy” followed by the Central Bank.
However, as I mentioned at the beginning, the positives greatly outweigh the negatives for Turkey at the moment. The export mix of Turkey has moved more toward automotive, construction and consumer electronics, and less toward lower mark-up industries such as textiles and agriculture. In addition, the trade with the Middle East, North Africa and Central Asia (Turkic republics) has increased considerably in the last five years, reducing the dependency on the European Union.
Lowering the barriers for trade and liberalizing the markets are the ideal policies for the world economy to prosper. However, economic history suggests that all of today’s advanced powers used some form of protection and various forms of tariffs throughout their industrial revolutions. Therefore, the rising economic powers should play it smart when it comes to opening up their markets.
Erdem Aktuğ is an assistant professor of finance at Richard Stockton College of New Jersey.