The Kapali Carsi

Quantitative easing III: Boon or bane for Turkey?

As you may (or may not) know, Economonitor is running a special topic this week: “Is QE3 harmful or beneficial to other countries?”. Therefore, as their in-house Turkey blogger, I decided to write about the same topic in my Monday Hurriyet Daily News (HDN) column- hitting one bird with two stones, as we Turks say:)…

The title summarizes the subject rather well. I also touch upon last week’s Fitch rating upgrade. The most interesting part of that, IMHO, is that the credit rating agency has basically upgraded Turkey although they believe a Balance of Payments crisis and recession is likely somewhere down the road. This is because Fitch believes the country has strong buffers against such a shock, which would minimize damage. In the column, I also explain why I disagree with this rosy assessment. Anyway, you can read the whole thing (and find out whether QE3 is a boon or bane for Turkey) here. As for an addendum, without giving away too much, since I discuss external vulnerabilities a lot in the column, it may be useful to use a slightly different approach here to study the country’s Achilles’ heel:

Economist Guillermo Calvo has reportedly said that we don’t know much more about economics than accounting identities. The identity I will make use of is the national income accounting one:

C + I + G + CA= C + S + T, where C is consumption, I investment, G government spending, S saving and T taxes

Cancelling out the Cs and rearranging yields:

CA= (S-I) + (T-G)

Simply put, the current account deficit is equal to private and public savings investment balance (the latter is more commonly known as the budget balance). Let’s see the right-hand side of this identity for Turkey:

And the left-hand side:

Of course, both sides are not exactly equal in practice for small details I mention as footnote when I teach macro and then completely forget again:) Let’s think through this to see how the current account may evolve in the next couple of years.

The government expects private savings rate to go up a couple of percentage points because of the pension reform. Let’s give them the benefit of the doubt, but then again, I’d expect investment to go up  as well, as the economy recovers (investment has been quite dismal in the last two quarters). As for public balances, I argue in the column that the government’s target of 2.2 budget deficit for next year may be a bit optimistic, as there will be local & presidential elections in 2014- and general elections the year after.

Soooooo: It is likely that the current account this year will be 7.2-7.3 percent of GDP. At this point, I see it increasing at least moderately (to 8 percent or so) next year- perhaps even more. Of course, the big unknown here is how the Central Bank will react- i.e. whether/to what extent it will try to curb excessive capital flows and credit growth. Governor Basci has said they would in recent TV interviews (I will discuss his recent remarks at an upcoming HDN column, which I will then post here), but it is useful to remember that doing so would conflict with the government’s growth-before-elections objective. It will be interesting to see how this will all play out….

4 Responses to “Quantitative easing III: Boon or bane for Turkey?”

recepyakarNovember 13th, 2012 at 7:02 pm

Dear Emre,

Being an EM country, it is unavoidable to not to bear CAD, frankly. But the sustainability of this deficit is crucial, as you pretty well reckon. As the country continues to import the savings it needed within the time, the core structure of the economy will keep the default rating in lines, IMHO.

Btw, i guess you meant to say hitting two birds with one stone :)



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