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