The next test for Turkey's democracy will be how it weathers 'the new normal' of slower economic growth. Because Turkey’s fundamentals are in order, its prospects seem quite positive, says Ali Babacan, deputy prime minister for the economy.
First the Taksim Square protests. Now the coming Fed “taper” that will raise global interest rates and jam growth in the emerging economies such as Turkey.
Many argue that much of Turkey’s growth in recent years, like that of Indonesia, India, or Brazil, has been fueled by low interest rates that have resulted from the expansive monetary policies of the US Federal Reserve – in essence, the world’s central bank.
Anticipating an economic recovery in the United States, the Fed has announced that it will “taper” the quantity of money it is pumping into the economy, causing interest rates to rise globally. How will this impact Turkey?
I put this question to Ali Babacan, Turkey’s suave and highly competent deputy prime minister for the economy.
There is good and bad in the mix. In the very short term, says Mr. Babacan, asset prices will fall as investors build in expectations of less money floating around. Then rates at some point will actually rise, forcing Turkey and other “emerging growth economies” with current account deficits to rein them in.
Beyond this, those countries that have not engaged in structural change during the boom years will now find it much harder to do so in a slower growth environment.
Fortunately, this is not the case for Turkey. Forced by its own financial crisis in 2001-2002 to get its debt and banking system in order – as well as put social benefits on a sustainable long-run path – Turkey is in good shape on this score. “These fundamental pillars of the economy are sound,” says Babacan.
This echoed what Prime Minister Recep Tayyip Erdogan told me in Berlin last March, when he noted that, paradoxically, Turkey has done a better job meeting the economic entry criteria to the European Union than many states that are already members.
In Europe in general, Mr. Erdogan noted, the average annual budget deficit has grown to 4.5 percent of GDP, while in Turkey it has fallen to 1.7 percent.
Overall, long-term debt in Europe amounted last year to 85 percent of GDP, while in Turkey it was only 37 percent. Turkish foreign currency reserves top $100 billion, and Turkey has paid back all of its loans to the International Monetary Fund.