Globalization has affected the world in many different ways, including cultural exchange, language development, and information diffusion, along with worldwide economic and financial growth. Here we wish to analyse the costs and benefits of globalisation to the Republic of Turkey. More specifically, we will look at the economic and business impacts globalisation has made on Turkey and its current position with regard to the world economy.
Current Economic Situation
Today’s economic outlook for Turkey is deteriorating. GDP growth has been revised to 3.6% for 2008 (against 4.3% previously) and to 3.0% for 2009 (previously 4.0%). Turkey’s unemployment rate rose to 9.4%. The slowdown in growth in 2007 (GDP growth of 4.5%) and 1H08 was mainly due to the deceleration in domestic credit following the rise in domestic interest rate (to dampen an acceleration in inflation).
External financing of the country’s large account deficit is becoming more challenging given the decline in FDI inflows and the global financial turmoil. The macro environment is more challenging for Turkish banks, because of weak economic growth and ongoing financial market volatility. Turkish banks have become better capitalised (at 17.5% at end-June 2008) and less reliant on wholesale funding (13%) since the 2001 crisis. We believe the asset quality deterioration is the main risk for the sector.
The sector has experienced higher default rates in credit cards and consumer loans in 2007 and 1H08. Although most Turkish banks are expecting higher NPLs for year-end 2008 and 2009, we believe that the impact of a sharp deteriorating macro environment in the loan asset quality is underestimated. We have to keep in mind that Turkish banks’ loan books remain untested through a full economic cycle and vulnerable to interest rate hikes.
The impact of the global slowdown on the Turkish economy,
Countercyclical budgetary policy:
In 2007, ahead of presidential and general elections, fiscal policy had already been relaxed (the primary surplus has been reduced to 4% from 5.5% in 2005-2006. In 2008 and 2009, fiscal loosening should be maintained ahead of local elections in Q2 2009 (Additional subsidies for agriculture, transfers to local administrations, and an 18.4% hike for civil servant salaries, etc.)
Since 2008, the financing of the current account deficit has become riskier with less FDI and thus more debt-creating capital inflows. Long-term borrowing remains the main source of financing, which is positive concerning external solvency but has also caused net short-term borrowing to increase.
In 2009, given that the global environment is not FDI-supportive, tensions on external liquidity could easily arise because the coverage of the current account deficit implies a high rollover ratio of the external debt.
Pre- late 1970s: Heavy government control. Trade protectionism. Before the 1980s, Turkish modernizers applied the import-substitution strategy. It was designed to make the country an independent producer of manufactured goods. The result was a striking unfolding of industry, especially between 1950 and 1977, when the industrial sector grew at an annual average rate of 8.6% in real terms (10% annually from 1973 to 1977), expanding its share of GDP from 12 percent to 25 percent. The country's infrastructure has been vastly improved and the industrial sector has achieved the ability to produce a wide range of products. The country's first factories processed food and nondurable consumer goods. Then they developed the intermediate industrial products, including cement, iron and steel, chemicals, and fertilizer. By the end of the 1970s, the country was developing capital goods industries and high-technology products. In spite of the diversity of production lines and the fast pace of the industrialization, Turkish industry was not able to attain efficiency. The excessive protection forestalled competition that...