EURODIALOGUE
Journal of International Relations, European, Economic and Social Studies
taneously pulling down interest rates, invoking expectations of inflation. These are all insular tendencies that would undermine the tremendous gains the Turkish banking system has made since 2001. In addition, and although banking sector reform considerably reduced the presence of the government in credit markets, adverse selection and moral hazard still play important role sin credit allocation. This concern becomes more evident when we look at project financing developments instead of consumer credits. Although the rate of inflation fell to single digits, long term project financing did not pick up. Lack of project financing in turn helped elevate the rate of unemployment. The government managed to achieve fiscal discipline as the Public Sector Borrowing Requirement (PSBR) declined. On the other hand, this could have a destabilising effect as the government becomes increasingly reluctant to use fiscal tools and relies excessively on the monetary authority. As economic growth was not providing room for dealing with high levels of unemployment, fiscal expansion signalled through announcements of government-led “crazy projects” such as building a waterway that would link the Black Sea to the Marmara Sea, on the shores of which a “new Istanbul” will be constructed. This chimes with Keynes’ famous dictum “to look after unemployment while the budget deficit looks after itself”. Some of the weaknesses highlighted above, plus a recent surge in unemployment, rapid credit expansion, and the sharp devaluation of the Turkish Lira, can potentially undermine the fast growing Turkish economy; and in the short term this might lead to a contraction. Managers of the economy and the corporate sector must keep an eye on global developments because it will be challenges to the management of the economy, dealing with most of these structural weaknesses, coming from foreign currency fluctuations in the presence of high level current account deficit and hazardous credit markets that make Turkey vulnerable to international swings. REFERENCES: Aybar S. et. al., (2010), Survey of Turkish Multinationals, Vale Center of Columbia, New York. CBRT, (2011), Financial Stability Report - May 2011, Central Bank of Republic of Turkey, Ankara.
Turkey on the European doorstep
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