ECB Report: Turkey’s economic vulnerabilities may harm eurozone

ISTANBUL (CIHAN)- The vulnerabilities of the Turkish economy — particularly stemming from last May’s winding down of the US Federal Reserve’s bond-buying stimulus program, which has had aerse impacts on the stocks, bonds and currencies of emerging economies, will likely have a detrimental effect on the eurozone economy, a European Central Bank (ECB) report has found.

According to the ECB Annual Report for 2013, Turkey, which is considered a vulnerable economy by investors and has thus witnessed a substantial deterioration in its economic and financial conditions since May of 2013, might have an aerse influence on the eurozone due their significant connections through trade and cross-border bank flows.

“Turkey exhibited domestic vulnerabilities, such as very strong credit growth, and external imbalances, above all a substantial current account deficit largely financed by short-term portfolio flows and an unfavorable ratio of short-term external debt to foreign exchange reserves,” the report stated.

Observers point out that Turkey has seen explosive consumption-led growth over the past decade, with per-capita wealth almost tripling in nominal terms, but its low savings rate and huge energy deficit have made it heavily dependent on volatile foreign capital flows.

Indeed, the Turkish economy started to feel the pressure after the Fed started trimming its bond-buying program, reducing the cheap funding available to finance Turkey’s gaping current account deficit, in December of last year. US bond-buying flooded emerging markets with inexpensive liquidity and allowed Turkey to finance its large current account deficit, running at around 7 percent of GDP, with cheap foreign money.

The ECB report indicates that the deteriorating economic and financial conditions in emerging markets would not affect the eurozone to a large extent due to their limited economic ties with those countries.

Yet the indirect effects of a slowdown in economic growth for developing economies might play a significant role in the eurozone’s economic outlook. “For example, a fall in commodity prices as a result of lower demand from emerging economies could improve the eurozone’s terms of trade, although it might also put additional downward pressure on inflation. Furthermore, eurozone foreign demand might be affected via indirect trade linkages if a slowdown in output growth in emerging markets were to affect economic activity in the eurozone’s major trading partners among the aanced economies,” the report said.

On the basis of its analysis of economic and financial developments in Turkey as a European Union candidate country, the report stressed that the ECB had continued its cooperation with the central banks of these countries in 2013 through bilateral meetings and within the overall institutional framework for the enlargement process set up by the EU. “The ECB held its annual high-level policy dialogue with the Central Bank of the Republic of Turkey in June in Ankara,” said the report.

(CihanToday’s Zaman) C