Why Turkey Is More Resilient Than Most

Posted on 14 February 2011

Date: 12/03/2009
Why Turkey Is More Resilient Than Most

When Prime Minister Tayyip Erdogan meets G20 leaders next month, he may well boast that Turkey’s sordid economic past makes it more resilient in a global meltdown.

Growing up in Turkey, one never bought anything for the same price. My first memory of any commercial transaction was buying chewing gum and Coca Cola from the local deli. I remember older kids in our neighborhood joking about the changing price of Coke. Because with double-digit inflation sometimes as high as 80%, prices constantly fluctuated in Turkey in the 1970s and ’80s–always going up.

Starting from the mid-1980s, the Turkish economy opened up. Soon it was flying–albeit on the wings of the “inflation monster.” Come the late 1990s, Turkey was a big emerging market, a shining example to developing nations, en route to European Union membership, at the crossroads of world energy hubs and eager to take on the world with a dynamic young population of 70 million.

All that came crashing down in 2001, when Turkish banks pulled a “Wall Street à la 2007,” self-destructing somewhat in the same way U.S. banks have. As the banking sector collapsed–not from mortgage-backed securities, but due to toxic assets, sloppy management and bad credits–the rest of the nation was left to foot the bill. Twenty-four banks went south in 2001; still many merged. Austerity measures to salvage the banking system–not dissimilar to what is now discussed in the U.S.–introduced significant oversight and regulation over the next few years. The International Monetary Fund (IMF) bailed Turkey out with billions of dollars and put in place a program that regulated the excesses of the Turkish economy.

Some good came out of all that misery. Between 2001 and today, Turkey has gone through the most glorious period of economic growth in its lifetime, averaging an annual 7%. Foreign debt, public-sector spending and the budget deficit have all significantly dropped while investments, employment, and GNP rose. Per capita income doubled (to roughly $5,500).

Even more incredulous to an entire generation of 30-somethings like myself was the oddity of going to the supermarket only to find that prices, with a mere 10% inflation, had not changed in months! In 2006, Turks erased six zeros from their once-ridiculed currency. Bridges, highways, pipelines and new refineries were built. As the world was entering a global recession in 2008, the state of the Turkish economy looked stronger than it ever had.

Perhaps this is why the capital, Ankara, has greeted the current global crisis with a bizarre self-confidence, maintaining a sense of optimism despite fires all around the world. Prime Minister Erdogan went so far as to suggest a few months ago that the global fever would “pass Turkey by.”

Why the smirk? It is the “what doesn’t kill you makes you stronger” argument. In 2001, the economy was so devastated that it came back far more durable. Turks are less panicked in large part due to their resilience; they are long used to adapting, cutting, shrinking, moving in with in-laws or back to their villages in times of hardship.

So will Erdogan project the same air of confidence when he meets G20 leaders, most of whom are juggling collapsing banks? Most bankers and bureaucrats I talked with over the past few weeks have said 2009 will be a terrible year for the economy–it will undoubtedly shrink–but for the financial sector, it will be nothing like 2001. Sure, there is talk of crisis here, but it probably will not affect the backbone of the economy: the financial system.

“What Americans are experiencing now is not very different from what we had back then. Even the exit strategy looks the same,” one banker told me. Having seen their key financial institutions collapse in 2001 has made Turkish banks today more risk-averse than many in the Western world. The sector remains transparent and closely supervised. Its debt is manageable; reserves are high.

Banks are less affected under the current global meltdown than their counterparts in the U.S. and Europe. How good a shape are the Turkish banks in? Bad credits currently account for only 3% to 4% of bank loans. While Washington is negotiating nationalizing Citigroup (nyse: C – news – people ), Turkish banks (Denizbank, Ziraat, Akbank, Garanti and others) are announcing profits for 2008. Banks will be affected by the general slowdown of the economy and the global liquidity shortage but not in a ruinous manner.

Still not convinced? Then look no further than the endorsement of Turkish financial banks from the most prominent recession prophet du jour, NYU professor and Forbes columnist Nouriel Roubini. Dubbed Dr. Doom for foreshadowing the current crisis almost two years ago, Roubini said in a recent interview in Business New Europe, “I don’t expect a full-fledged crisis in Turkey, but it’s going to be a rough year. … I don’t expect a real financial crisis in Turkey like the one they experienced in 2001–the banks are in much better shape, much better regulation of the financial system, the fiscal position is sounder.”

Not a full-fledged crisis but a junior one? We’ll take that! Born in a forever-crisis climate, most Turks know how to survive one, even if it means huge personal sacrifices. “And for a change, we are not responsible for this one,” one banker pointed out.

That is not to say that Turkey is unaffected by what is going on. There is distress in every part of the economy. Layoffs are a painful reality. Manufacturing, exports and consumption have all suffered over the last few months. Markets are jittery; the lira is volatile. In Istanbul, once-buzzing restaurants are empty. Even the traffic seems less.

But all that could be somewhat relieved if the government can reach a deal with the IMF and get its hands on the Fund’s $20 billion. Ankara is dragging its feet to sign an unpopular IMF deal that the markets want badly. They have a point in resisting IMF’s old school “slow spending, shrink your economy” recipe at a time when government spending is the only cure to economic slowdown. But the absence of lucrative IMF loans will certainly mean liquidity problems in the months ahead, when Turkey’s foreign debt payments come up.

“An IMF deal is more of an endorsement, a signal to investors globally that Turkey will have fiscal discipline. If an IMF deal is not signed, expectations would dampen, and Turkey’s risk premium would go up. That in turn would affect many other things and the cost of living here,” said Osman Turkay, managing partner at Strateji Securities, an asset management firm in Istanbul.

Businessmen see the IMF deal more as a psychological need, a vote of confidence in the minds of cynical Turks, than anything else. “If the IMF deal does not happen,” Bilal Cetin, a well-known economy columnist, told me, “We will really suffer. We won’t necessarily die, but it will be agonizing.”

“And what is new?” most Turks would say. 12 March 2008

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