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  • ANKARA; Gov't losing reformist tone, missing historic opportunity

    Today's Zaman , Turkey
    Aug 2 2009



    Yapıkredi economist: Gov't losing reformist tone, missing
    historic opportunity



    According to YapıKredi chief economist Cevdet Akçay, the
    Turkish economy is faring worse than expected, largely due to the
    Justice and Development Party's (AK Party) failure to allay people's
    fears and positively affect their expectations about the future.

    The blame falls mostly on the AK Party as the governing body, but the
    whole system failed the test as no one succinctly provided a set of
    prudent measures, and chaos has reigned for a long time.

    The tragedy, according to him, is that the economic quagmire in which
    Turkey has found itself mired was largely avoidable and mostly
    resulted from the AK Party's loss of momentum on the reform front and
    the party's consequent drift towards the center of an unhealthy
    political spectrum in dire need of reform.

    As the party moves towards the center, he feels, it has begun adopting
    the center's unsettling populist political and economic rhetoric. This
    shift in the party's orientation is even more tragic because Turkey
    was poised to be one of the countries least affected by the
    crisis. Turkey's gross domestic product (GDP) contraction and
    unemployment figures are now registering some of the steepest drops in
    the world.

    `If someone asked me to describe a country at the beginning of the
    crisis that would be exposed to minimal damage,' said Akçay, `I
    would describe a country which had the following main tenets: an
    economy as large as possible; a finance sector that seems like a
    midget when compared to the size of the economy; low levels of
    leveraging in the financial sector; a banking sector in good health;
    and a country where growth is not led by exports. I just described
    Turkey. ¦ We were supposed to be exposed to minimal damage.'

    Most economists agree that trade is a factor that is fundamentally
    affected by external forces beyond the hands of any one particular
    government. And international finance, largely affected by
    international liquidity, is beyond any country's control.

    However, expectations and confidence in the market are ultimately in
    the hands of the government, and the degrees to which these can be
    instilled in the market have profound implications for domestic
    consumption and investment -- two areas that ultimately determine the
    health of economies such as Turkey. In Turkey, private consumption
    accounts for 74.7 percent of GDP, while private investment accounts
    for 17.4 percent.

    `The problems people contemplated a year ago about non-bank corporate
    rollover problems did not materialize' to the degree expected,
    Akçay said. But hardly anyone expected the clobbering
    experienced by the domestic sector. Nor were the banks expected to
    slam on the brakes with respect to the extension of credit to the real
    sector, especially small and medium-sized enterprises (SMEs), which
    have choked many weaker companies.

    Banking sector not to blame

    In stark contrast to some -- such as the Independent Industrialists
    and Businessmen's Association (MÃ`SÄ°AD), who have claimed
    that banks, whose profitability increased by 30 percent during the
    first quarter during a time when the real economy contracted by 13.8
    percent bear much of the responsibility -- Akçay places the
    lion's share of the blame on the government's failure to adequately
    affect expectations.

    `The duty of the banks is not to extend credit,' he emphasized. `If
    you are a bank open to the public and listed on the Ä°stanbul
    Stock Exchange [Ä°MKB], your duty is to protect your
    shareholders' interests.'

    `Any bank can commit two mistakes, with respect to credit extension:
    extending credit to someone who is not creditworthy, or refusing
    credit to someone who is worthy. In normal times, you might prefer to
    extend credit to someone you maybe shouldn't have if you have a good
    loan book, even if that person is risky.' But, he says, during times
    of crisis banks are prone to choose the second error -- refusing
    credit to normal-risk borrowers -- which he describes as `a knee jerk
    reaction, because you can't see what's coming.'

    `It's the duty of the government to convince the public at large --
    including the banking sector -- that they have everything under
    control,' he said. `If you can contain people's expectations to
    reasonable levels,' Akçay continued, `then the system has a
    chance of working. But if people have too much uncertainty and if they
    are unconfident that the proper policies will be implemented, then
    they put the brakes on with respect to investment and consumption.'

    He implies that had the government taken more prudent measures, there
    may have even been an increase in credit extension by some
    banks. `Suppose the cleverest bank in the system sees that despite the
    crisis there are prudent measures being taken by the government to
    handle the crisis successfully. Then that bank would not cut credit
    lines. And if it sees other banks reacting differently, they would
    probably be over-extending, to capture market share. Because they are
    very much assured that the top management is doing exactly what's
    supposed to be done and that these troubles will soon pass.'

    Private investment most important factor

    According to the latest figures, domestic consumption in Turkey
    contracted 9.2 percent in the first quarter -- a figure not all that
    out of line with the rest of the world. But private investment plunged
    a staggering 35.8 percent in real terms. In a paradigm where export
    markets are contracting, international liquidity is becoming ever
    scarcer and where the vast majority of the economy is predicated on
    domestic investment, affecting expectations can be seen as a
    make-or-break endeavor. Indeed, the effects of this have been
    devastating and have played a significant role in the skyrocketing
    rates of unemployment, which clocked in at 14.9 percent for the month
    of April, and the unprecedented GDP contraction of 13.8 for the first
    quarter.

    `People must understand that you [the government] interpret the
    domestic and global and domestic pictures correctly and that you will
    be implementing effective and prudent measures,' Akçay argued.

    It was not an insurmountable task, he maintains, provided
    confidence-building measures were taken by the government. Turkey was
    not very exposed to risk: the financial sector was well capitalized,
    toxic assets did not exist on banks' balance sheets and the overall
    lack of sophistication in the Turkish system with respect to financial
    instruments made it so that highly leveraged instruments were almost
    nonexistent.

    `The derivatives markets had just started developing when the crisis
    struck,' said Akçay. `If the crisis hit three years later, we
    would have been much harder hit. We could have had toxic assets. The
    crisis hit at just the right time for this country.' Nor were Turkish
    households and the real sector highly leveraged like elsewhere in the
    world.

    IMF agreement would have made the difference

    For the large part, Akçay feels that the AK Party's rhetoric on
    the country's thorny relations with the International Monetary Fund
    (IMF) constituted considerable reason to distort expectations; not
    only did the government's ambiguous statements spook investors, but
    the rhetoric contributed to erode the confidence, both domestically
    and internationally, required to implement any confidence building and
    convince the public that the government was on top of the situation
    and hence encourage investment.

    AK Party rhetoric, including statements made last October by Prime
    Minister Tayip ErdoÄ?an, who said the IMF would `squeeze
    Turkey's throat' and added that `we will not cast our tomorrows into
    darkness by bowing to IMF demands in this time of crisis,' was largely
    to blame, Akçay feels.

    `If I were AK Party, I would have marketed the IMF as a good partner
    if you know how to use them,' Akçay explained. `I would have
    said, as the AK Party I am competent enough to work with this
    institution, but the guys before me were not -- that's why the IMF
    failed before.'

    Turkey has signed 19 agreements with the IMF throughout the country's
    decades-long affair with the institution, 17 of which have failed. The
    only two successfully completed agreements occurred under the
    leadership of the AK Party. In Akçay's view, had the government
    successfully argued that the `IMF is not a monster, it's a partner'
    and convinced the public that the game with the IMF is not zero-sum,
    an ensuing agreement would have much better laid the groundwork for
    Turkey to better weather the crisis.

    Critics of the IMF have long asserted that IMF austerity measures
    would only serve to exacerbate Turkey's woes during the crisis and
    require further cuts to government funding in the real sector.

    `The IMF has been very lenient on Turkey. If people say that the IMF's
    policies were strict, they should take a look at the numbers
    again. They have been lenient to Turkey in normal times. Now, they
    would be particularly lenient.'

    Observers have long held that the twin anchors of the IMF and the EU
    have been instrumental to the economic and political reform process in
    Turkey. On the economic front they point to numerous macroeconomic
    indicators as well as the success of the AK Party government in
    preparing budgets over the last seven years under IMF tutelage. Six
    budgets went off without a hitch, despite critics' initial denigration
    for being overly ambitious. The 2008 budget has been the only budget
    to be way off the mark, and it was prepared without an IMF agreement.

    Supporters of an IMF agreement say that it's hard to imagine a
    scenario whereby a $35-45 billion agreement with the fund would not
    have helped Turkey. The Turkish Treasury would be more secure, there
    would not be rollover rates of 100 to 110 percent and financing
    problems would be solved.

    For Akçay, the matter is quite simple: `Does anyone know
    whether there will be a financing problem at the end of the year?' His
    answer is `no' -- although there has not yet been one. `But, if the
    IMF was in the picture, is there any guarantee that there will not be
    financing problems at the end of the year? The answer is yes, which
    means I wouldn't have to worry about upward pressure on the effects of
    foreign exchange or non-bank corporate repayment problems.'

    `It's all about expectation management. They missed the train for no
    good reason.'

    AK Party losing its reformist nature cost it the election

    Akçay feels that the AK Party's handling of the IMF debate is
    part and parcel of a larger ailment that the party is succumbing to as
    the party loses much of its former reformist glory in favor of moving
    towards the center of the political spectrum -- an unhealthy center,
    in dire need of reform. `The AK Party must change the center, make it
    more EU-compatible, more Obama-compatible. Changing the center would
    be the biggest service it could do for the country. ¦ What they
    said could have come from the ODP [Freedom and Solidarity Party], the
    MHP [Nationalist Movement Party], the CHP [Republican People's Party]
    or a leftist faction.

    `I think the rhetoric that differentiates you from the rest of the
    parties is going to work best. The thing that helped AK Party was that
    they were different from the rest of the bunch. They lost votes in the
    last election because they began speaking like the rest of the bunch.'
    This applies to the handling of a host of issues, from the Kurdish
    question to the Armenian issue to problems in Iraq.

    As a final note, which he calls the last but not the least, he claims
    that there is one very common mistake committed by all who attempt to
    assess the AK Party's performance. And that is the attempt to assess
    the AK Party without trying to understand the constraints within which
    they were working and the psychology that they operated under. The
    post-non-closure decision era is a very indicative case, he
    claims. The AK Party could and should have felt victorious after the
    decision, but they felt beaten up and reprimanded. He states that his
    prediction before the closure case was the following, which he notes
    materialized almost exactly: `The AK Party will not be closed, this is
    virtually impossible in today's Turkey, but the AK Party will not be
    the smooth operator that it was prior to the case, and that is the
    biggest risk going forward, as it entails weaker governance and higher
    uncertainty.'

    02 August 2009, Sunday
    DAVID NEYLAN Ä°STANBUL
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