Turkey to feel pain of global credit crunch though can soften it

"If Turkey fails to be able to make good maneuvers in this process, then it has no chance to avoid the severe affects of the crisis, however it would not be as severe as it was in the 2001 crisis," Burak Saltoglu, economy professor at Turkey's Bogazici Universty told HotNewsTurkey.
 
Turkey will face tougher times in attracting both direct and portfolio investments from abroad, which is crucial for the momentum that gives sustainability to its economy, Saltoglu said.�
 
The cost of  the liquidity will be higher than it was during 2002-2007 period, and fast growing financial markets will slow down to a moderate pace in the same period, he added.
 
The global credit costs is on the rise in the coming term, seen more clearly after the confidence weakening in world financial markets on the fall of well-known banking institutions.
 
This sentiment and the latest U.S. government spending plan to bailout risky institutions pose big risks to its economy with the increasing debt burden that is likely to lead to a long lasting inflationist term in the country, together with higher interest rates that will draw the liquidity from emerging markets back to this country, he also said.
 
The U.S government offered a controversial $700 billion bailout plan to ease the financial markets, which still have doubts over the problems arising from the housing bust that led to a series of bankruptcies and takeovers among a number of investment banking institutions. However,  U.S. lawmakers unexpectedly rejected the plan, which the investors saw as an essential move for halting a global market meltdown.

TURKEY’S ROAD MAP
Turkey, along with other emerging markets, has so far avoided the worst effects of the global credit crunch.
 
However economists and market players increasingly warn that this situation will not last and the necessary precautionary measurements should be taken.
 
Saltoglu said the Turkish government could reduce the brokerage costs of banking to decrease the private sector’s loans abroad and eventually reduce the risk premium of the country.
 
As a second measure, the government may have flexibilities to encourage funds belonging to Turkish investors in the foreign banks be brought back into the country, Saltoglu added.
 
He said Turkey may pay a higher price if it does not take these measures and sacrifice some of its revenue when asked if the country had adequate economic power to finance these precautionary actions.
 
Such steps would help Turkey to reduce its record-high current account deficit, seen as the weakest point of the economy. The current account deficit rose over $30 billion in the first seven months of 2008. Turkey’s current account deficit is expected to reach $50 billion by the end of this year.

GROWTH TO SLOWDOWN
"Another impact of the crisis is likely to be seen in Turkey's growth rate," Saltoglu also said. Turkey's economy dynamics stand on the 5 or 6 percent yearly growth rate expectation, 2 or 3 percent growth rate will not be enough for Turkey, Saltoglu.

The Turkish economy had slowed in the latest quarters and the growth rate dropped back to 1.9 percent in the second quarter from 6.7 percent in the first quarter, significantly below the consensus expectation of 3.7 percent.
 
Saltoglu also said the price of oil was especially important while the U.S. passes through this transition period. In case of such an increase in oil prices, cost inflation in Turkey will rise and the country will not be able to cut the interest rates. “This may even force Turkey to hike interest rates.”
 
Turkey's benchmark interest rate, currently at 16.75 percent, is among the highest in emerging markets, restricting domestic demand and growth.