Transcript Diapositiva 1

EZ’s ‘Identity’ Crisis and
Its Impact on the Turkish Economy
Murat Üçer
IKV Meeting, Istanbul: February 24, 2012
Main Points
 With LTRO and Greek PSI, EZ got some more breathing




space.
But real adjustment issues are daunting.
Turkey is tightly wired to the EU/EZ.
It should make contingency plans taking into account the
fact that deepening of EZ problems would not hit Turkey
through external demand (trade/growth) alone, but also
through availability of external financing.
We saw this happen last year.
Slide # 2
EZ Adjustment Economics 101
 Financing does not solve problems, it buys time…
 At a real level, EZ has simultaneously:
 a public debt sustainability problem. So it’s premature to

call the end of the Greek problem and further contagion.
an external imbalances problem. So competitiveness
gaps between north and south have to be mended
 Neither of these is easy to resolve…
 An extra complication: Monetary financing the ECB is
doing these days comes with no ‘conditionality’ to EZ as
a whole, which may remove incentives to formulate a
tighter fiscal framework (Fiscal Union?) in the long run.
Slide # 3
The Debt Sustainability Problem: Figures
Source: IMF, Fiscal Monitor
Slide # 4
The Debt Sustainability Problem: Basic Math
Change in Debt/GDP [∆(D/Y)] < 0
∆ in Debt = Primary Deficit + Interest Payments
∆ in GDP = Growth + Inflation
So ∆ in Debt < ∆ in GDP after a little math we get:
(Interest Rate–Growth) x D/Y < Primary Balance
For this equation to work Greece has to:
 Reduce D/Y to some negligible level
 Reduce r, increase g and move pb>0 permanently…
Even after a painful PSI, we are nowhere there yet…
Slide # 5
The External Imbalances Problem: Figures
Source: Krugman blog, NYT
Source: WEO, our calculations
Slide # 6
The External Imbalances Problem: Basic Math
Remember Y = C+I+G+X-M?
Y = Domestic Demand (A or C+I+G) + Foreign Demand (X–M)
When A > Y  Current Account Deficit  Financing/Change
in Net External Position
When this is no longer feasible, the country has to:
1) Cut A through tighter policies notably fiscal adjustment
(G↓) (‘internal devaluation’); and/or
2) Depreciate the currency to reduce wages in foreign
currency terms and hence, switch the composition of
demand (‘rebalance’) from A to NX (‘external devaluation’)
Slide # 7
External Imbalances Problem: Basic Math
Recall that for a country to gain ‘competitiveness’, the
following has to hold:
ΔP*/P* ≥ ΔW/W - Δ[Y/L]/[Y/L] - ΔE/E
where P* = Foreign price of the commodity
W = Nominal wage in local currency
Y/L = Productivity (output per labor)
E = Local currency price of a unit of foreign currency
Since ΔE/E = 0; we need wage deflation and productivity
increase….
Both take time and are politically very, very difficult...
Slide # 8
Competitiveness Problem: Figures
Unit labour costs in selected EU nations
Source: http://www.voxeu.org/index.php?q=node/7536
Slide # 9
Turkey and the EU/EZ
 We have very strong links
 In trade and tourism
 Despite the recent diversification, some 45% of

Turkish exports still go to EU
 In finance
 Some 80% of our MLT debt is to European Banks
 Some 80% of FDI has come from EU
More broadly, negative confidence and bank implosion
effects -- if EZ problems deepen -- would be very
significant because for growth, we need others’ savings.
Slide # 10
Some export diversification, but still…
Slide # 11
Likewise with FDI…
Slide # 12
Bank deleveraging has started in Q3
Source: BIS; BIS banks assets and liabilities vis-à-vis Turkish residents.
Slide # 13
Turkey’s growing CAD is a challenge…
Slide # 14
Growth and inflows are highly correlated
Slide # 15
What Should We Do?
 I don’t know…
 But at least:
 Be prepared, avoid complacency, do not assume that
problems are gone…
 Conduct a detailed scenario analysis and formulate a
Plan B…
 Try to diversify (exports, FDI, etc.) as much as possible
through public-private partnerships…
 Save (fiscally) for the rainy days…
Slide # 16
GlobalSource Partners
Ucer-Mizrahi Info Systems
708 Third Avenue
18th Floor, Suite 1801
New York, NY 10017
Tepecik Yolu, Devran Apt.
1/18, Etiler
Istanbul, Turkey
[email protected]
www.globalsourcepartners.com
Murat Üçer
[email protected]
[email protected]
90 212 352-1270 Phone
90 212 352-4520
+ 1 (212) 317.8015
+ 1 (212) 317.8318
Phone
Fax
Copyright 2009 GlobalSource Partners. All rights reserved. This presentation and its corresponding research reports are prepared for the use of GlobalSource Partners clients and may
not be redistributed, reproduced, stored in a retrieval system, retransmitted or disclosed, in whole or in part, or in any form or manner, without the express written consent of
GlobalSource Partners. The research report is distributed via email and simultaneously posted to this website and other portals by GlobalSource Partners. The information herein was
obtained from various sources and is believed to be reliable but GlobalSource Partners does not warrant its completeness or accuracy. Neither GlobalSource Partners nor any officer or
employee accepts any liability whatsoever for any direct, indirect or consequential damages or losses rising from any use of this report or its contents.