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Making a Splash 9 mai 2012

Posted by Acturca in Economy / Economie, Istanbul, Turkey / Turquie.
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The Wall Street Journal Europe (USA) May 9, 2012, p. 21                    Türkçe
The Journal Report: Turkey

By Joe Parkinson, Istanbul

Turkey has posted record growth, but is it really doing what it says on the tin?

In a lofty gallery in Istanbul’s bustling Beyoglu district earlier this month, Kerimcan Guleryuz was putting the final touches to his latest exhibition and forecasting another record year. Promoting local artists whose works now sell at up to 10 times the value of two years ago, Mr. Guleryuz has seen demand for Turkish art explode while many other markets have been choked by financial crisis.

« I’ve worked in art markets around the world for two decades and I’ve never seen an expansion like this . . . and it feels like we are just at the beginning, » Mr. Guleryuz said as he toured the gallery’s exhibition spaces and 100-seater auditorium. « The art market is booming but no-one really expected it to happen this way . . . many people think it’s too good to be true. »

Ignored for decades but now underpinned by a domestic consumer boom and a wave of foreign capital, Turkey’s booming art sector is just one pocket of an economy that has rebounded spectacularly from the financial crisis; an apt metaphor for a country emboldened by its economic performance but simultaneously concerned that its expansion may be unbalanced and unsustainable.

Turkey grew 8.5% last year, posting the fastest growth of any major world economy except China. That followed an expansion of 9% in 2010, powered by a consumer boom and an industrial sector firing on all cylinders. The auto industry has emerged as an alternative auto production hub to established production bases in Eastern Europe and Russia, while free-spending consumers have sucked up easy credit from comfortably capitalized banks, helping to fire growth.

Regional Power

Turkey’s government expects growth to slow to a 4% expansion this year, but consumer indicators underscore the nation of 75 million’s re-emergence as a regional economic and diplomatic power.

According to a study by the Boston Consulting Group, shopping malls and airline passengers in Turkey have tripled in the past decade. Auto sales rose 120% during the same period, while consumer loans surged to 129 billion Turkish lira ($81.55 billion) from 2 billion lira. The value of private pensions rose more than eightfold in the five years to 2010. Meanwhile, Istanbul — Turkey’s booming metropolis driving the recovery — has developed into a fashion and tourism hub and recently ranked above four Chinese cities as the world’s most dynamic metropolitan center, according to the Brookings Institution.

Turkey’s policy makers have been quick to take praise for the expansion of the economy, which stands in stark contrast to neighbors in the European Union and the Middle East, where debt woes and political uprisings have darkened the outlook. Turkey’s popular but polarizing prime minister, Recep Tayyip Erdogan, has repeatedly predicted that Turkey will jump six spots to become one of the world’s top 10 economies by nominal gross domestic product by 2023, the centenary of the founding of the Turkish Republic.

Many investors have been seduced by an unfamiliar political stability in Turkey. That consistency has been provided by Prime Minister Erdogan’s ruling Justice and Development Party, or AKP, sculpted from banned Islamist parties into a Muslim version of European-style Christian Democracy. The AKP has dominated the political landscape since sweeping to power in 2002, securing its third straight landslide election victory last year.

Turkey still has deep political divides. Hundreds of top military officers, including generals and a former chief of staff, are currently on trial charged with plotting against the Islamist-leaning government. Concerns over weak government have been replaced with fears that politics has become dangerously predictable, with the ruling party, and particularly Mr. Erdogan, increasingly autocratic and intolerant of dissent.

But gone, it seems, are the bad old days of the 1990s when squabbling coalition governments sidestepped structural reforms and triple-digit inflation erased savings.

« There’s still significant political noise in Turkey which investors take note of, but, from a historical perspective, the political risk now is very low and that’s a more important driver of investment decisions, » says Simon Quijano-Evans, chief emerging-markets economist at ING in London.

« There are concerns about some aspects of policy but the government has put into place some solid reforms and from a long view it seems like it’s an economy of strength, » he says.

Underpinning political stability is economic potential; with a youthful population of 75 million and a relatively cheap labor force, Turkey likes to market itself as more of a BRIC than a bubble.

If only it were that simple.

For a growing number of investors, Turkey’s boom is looking increasingly unstable. One side-effect of the boom is an inflation rate that has risen sharply to hit 10.4% in March, spurred by a dramatic cut in interest rates and a weak currency. The double-digit figure, though expected to ease in the months ahead, is well above the central bank’s target and the inflation rates of most of Turkey’s emerging-market peers. The bigger problem, however, is that the country’s rapid growth rate is supported almost entirely by demand, sucking in imports and pumping the current-account deficit to 10% of gross domestic product.

The rapid widening of Turkey’s current-account deficit is in one sense symptomatic of the country’s strong rebound from recession, as the economy is unusually dependent on imports and domestic demand. But the scale of the deficit — and particularly the speculative or « hot money » assets that are financing it — has unnerved some investors and Turkish policy makers, while ratings agencies regularly cite the imbalance as a reason for keeping fast-growing and fiscally disciplined Turkey below investment grade.

The issue of funding Turkey’s current-account deficit with speculative financing has been magnified by near-zero interest rates in the developed world, which has sent waves of hot money flows seeking higher yields toward emerging markets with higher interest rates, such as Turkey.

Turkish policy is unclear and the recovery is unbalanced; it’s obvious where Turkey’s vulnerabilities lie.

Economists and ratings agencies have repeatedly warned that the short-term money funding Turkey’s current-account deficit could exit fast if market sentiment turns negative, leaving the economy vulnerable to a hard landing, or hefty correction, that could prompt panic and send asset values tumbling.

Analysis by research institute Tepav shows the ratio of Turkey’s current-account deficit to foreign-exchange transactions, a measure of the deficit’s unaffordability, is at 37%, well above peaks reached just before Turkey’s past four economic crashes.

Market confidence in Turkish assets wobbled at the end of last year as sentiment dived amid fears over the euro zone and its banks. The central bank stepped in to defend the lira, which briefly touched a historic low against the dollar.

But Turkey has limited foreign exchange reserves for this kind of intervention and is restricted in its capacity to fend off any big decline in its currency. Its problem is that economic growth has not been driven by exports, which bring in dollars when goods are sold abroad. Some analysts say Turkey’s foreign-exchange reserves would soon have approached critically low levels had it continued to sell dollars to support the lira.

In times of positive market sentiment, the central bank has also moved to keep the currency from appreciating, which offered a lift to exports. But that boost is unlikely to come to the rescue; the European Union remains Turkey’s biggest export market, while its fastest growing market was — until the Arab Spring — the Middle East. Both are in trouble.

Turkey’s central bank has also since 2010 tried to curb hot money and damp inflation while maintaining growth with a new policy framework: tightening monetary policy by varying overnight borrowing rates for commercial banks within a wide corridor of 5.75% to 12.5%, while leaving the main policy rate unchanged.

Interest Rate Corridor

But for many international economists this so-called interest rate corridor has simply raised more questions about the wisdom of the country’s monetary policy, which they fear could drive its fast-growing economy toward a hard landing and even recession later this year.

« Turkish policy is unclear and the recovery is unbalanced; it’s obvious where Turkey’s vulnerabilities lie. When the two are combined it builds a perception among investors that the economy’s success is built on an illusion of stability, » says Atilla Yesilada, an analyst at Istanbul-based Global Source Partners, an economic research firm. « We’re not sure how vulnerable the edifice is yet, » he says, « but I guess we’ll find out. »

The central bank has defended the economic logic of its decisions, stressing that policy has tightened significantly in recent months and that an unorthodox response was required to curb surging domestic demand and shore up the Turkish lira, which weakened some 20% against the dollar last year.

Still, many economists and bankers believe monetary policy can’t fix what ails Turkey. The country produces minimal quantities of oil and gas.

Meanwhile, manufacturers face high costs relative to competitors, economists say, and so tend to use imported semi-finished goods rather than produce their own components. As a result, as Turkey produces more, it imports more — 85% of Turkish imports are commodities and semi-finished products, fueling the current-account deficit, which unnerves investors.

Despite the imbalances and growing specter of risk, the strength of Turkey’s rebound has shifted perceptions that the economy is a perennial underachiever.

Turkey remains a rare bright spot among European economies; its vast economic potential is obvious. The raw materials are in place: a strategic location between Asia and Europe, a democratic political system and age-old tradition as a trading hub.

But market skepticism about the sustainability of Turkey’s growth story is rising, and the stakes are high. The government’s electoral success and increased international clout are based largely on growing prosperity, successes that a sudden downturn could damage.

Policy makers must overcome structural imbalances and concerns over monetary policy if Turkey is to convert an impressive growth spurt into a sustainable expansion.

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