Presentation on theme: "IKV Meeting, Istanbul: February 24, 2012 EZ’s ‘Identity’ Crisis and Its Impact on the Turkish Economy Murat Üçer."— Presentation transcript:
IKV Meeting, Istanbul: February 24, 2012 EZ’s ‘Identity’ Crisis and Its Impact on the Turkish Economy Murat Üçer
Slide # 2 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 # 3 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 # 5 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 # 6 The External Imbalances Problem: Figures Source: WEO, our calculations Source: Krugman blog, NYT
Slide # 7 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 # 8 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 whereP* = 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 # 9 Competitiveness Problem: Figures Source: Unit labour costs in selected EU nations
Slide # 10 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 # 11 Some export diversification, but still…
Slide # 12 Likewise with FDI…
Slide # 13 Bank deleveraging has started in Q3 Source: BIS; BIS banks assets and liabilities vis-à-vis Turkish residents.
Slide # 14 Turkey’s growing CAD is a challenge…
Slide # 15 Growth and inflows are highly correlated
Slide # 16 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…
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