CEO of Isbank
Signs of economic slowdown in many parts of the world are increasing. There are fears that the euro area might enter its third recession since the global crisis. Despite the efforts made by the Bank of Japan, the Japanese economy is still struggling to achieve higher growth rates. The United States, on the other hand, appears as one of the few bright spots in the global economy, with a relatively strong growth performance and an improved labour market. The Fed, which is planning to start raising what has been an historically low policy interest rate, still needs to take into account the impacts of stronger US dollar and higher interest rates on already weak global demand. The deepening concerns over global economic growth have also dragged energy and commodity prices down: the fact that oil prices have declined by nearly half since June 2014 reflects the significance of such concerns.
In this rather dim global economic environment, the worries over growth prospects in emerging market economies also intensified, as these are expected to suffer from the deceleration in global trade. In particular, commodity exporters such as Russia and Brazil are likely to suffer most.
On the other hand, net energy importers such as Turkey will be among the main beneficiaries of the upcoming global economic conjuncture. The decline in energy prices will help contain the upward pressures on Turkey’s current account deficit, which is widely cited as the economy’s Achilles heel. In fact, the current account deficit is already much lower now than it was a year ago. The measures taken by the banking authority in order to dampen the growth in consumer loans and the Central Bank of Turkey’s tight monetary policies implemented especially in the first half of 2014 put a brake on the growth in domestic demand and imports. In contrast, the momentum in exports was sustained despite the problems in Turkey’s major markets. Thus, 2014 was a year of economic rebalancing for Turkey. We expect that domestic demand will pick up in 2015 compared to 2014, but only modestly, without putting pressure on the current account deficit or undermining financial stability.
The key question for the coming period is whether the Turkish economy can cope with the mounting risks in the global economy, the main one being the Fed’s tightening. Sooner or later, the Fed will start raising interest rates. The rate hike cycle will lead to a higher volatility in global financial markets and some liquidity will be withdrawn from emerging markets. The magnitude of spillovers from a Fed tightening will depend on the timing and the pace of rate hikes.
Rising geopolitical tensions in Turkey’s neighbouring countries, particularly Iraq and Syria, form another notable risk for Turkish economy.
The fact that the Turkish economy has demonstrated significant resilience in the face of several external and domestic shocks over the past few years makes us feel confident that the economy will weather the repercussions of those risks as well. Two factors help explain this resilience. One is the fiscal discipline that has been the main pillar of Turkish macroeconomic policies since the 2000-2001 crises. In fact, Turkey managed to reduce its government debt from 74% of GDP in 2002 to around 33% of GDP in 2014.
The other factor is the soundness and robustness of the Turkish banking sector. The healthy balance sheets of Turkey’s banks and the banking authority’s conservative approach and proactive policies allowed the banking sector to maintain its strong capital adequacy ratios and good asset quality under difficult market conditions. As of September 2014, the capital adequacy ratio in the sector is 16% and the non-performing loans ratio is 2.7%. Thanks to their good reputation, Turkish banks have had no difficulty accessing foreign wholesale funding even though the risk perception of emerging markets has deteriorated.
In sum, the global economy is entering a period of slower growth and risks for emerging market economies are rising. Although Turkey’s strong macroeconomic fundamentals and flexibility of its economy provide a certain level of immunity to those risks, the Turkish economy is nevertheless expected to grow below potential for the next few years. In order to restore growth to its potential trend, bolster productivity and avoid falling into “middle-income trap”, Turkey should now focus on microeconomic reforms especially in core areas such as education, business environment, the labour market and energy. Realising these reforms will allow Turkey to strengthen its reputation as an appealing destination and a reliable market.
©OECD Observer No 301, Offprint January 2015
Turkey: Banking on resilience
|"Turkish banks have had no difficulty accessing foreign wholesale funding."|
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