SEYFETTIN – Awaiting the new Cabinet

Awaiting the new CabinetForeign Minister Ahmet DavutoIlu has been nominated by the Justice and Development Party (AKP) as the future prime minister, as was expected. Now, the business community is anxiously awaiting the composition of the new Cabinet next week.

Whether Deputy Prime Minister Ali Babacan, who is in charge of economic affairs, will keep his post or not is of utmost importance for the future of the Turkish economy.I have long tried to explain in this column the risks at stake if Mr Babacan is replaced by a new head of the economy who will impose radical changes in monetary policy and then proceeds to develop a new macroeconomic set up consistent with the economic views of Mr ErdoIan.

I wrote many times that this need for consistency makes the departure of Mr Babacan necessary. However, according to the rumors circulating in financial circles, Babacan may keep his post.

This might be right. Nevertheless, the following question would remain unanswered in this case: Will Babacan pursue the policies required by andldquobalanced growthandrdquo since he is its architect, or will he implement new policies from the old economic populism that prevailed in the 1990s?I do not think that Mr Babacan will accept changing his mind.

Let me remind you what is at stake. Economic stability reigned in the last decade.

This stability boosted economic growth, allowing the AKP to be successful in increasing overall social welfare. The economic stability was basically due to a well-functioning open-market economy, which was owed to a sound fiscal policy and respect for the autonomy of key economic institutions such as the Central Bank of Turkey, the Banking Regulation and Supervision Agency (BDDK), etc.

Economic stability fortified by the start of membership negotiations with the EU — boosting tremendously foreign direct investment (FDI) flows — provided a crucial contribution to the fairly high economic growth by encouraging investment and enabling the pursuit of foreign borrowing. This ability enabled the gap to be filled between low domestic savings and high investment — in other words, financing a rising current account deficit that reached 10 percent of gross domestic product (GDP) by the end of 2011, a striking record by all standards.

Aware of the dangers of an unsustainable current account deficit, the economic team led by Babacan proceeded to a re-balancing of the growth regime called andldquobalanced growth.andrdquo In this new regime net exports must contribute positively to GDP growth while the increase in domestic demand must be mitigated.

This framework should have been supported by a series of important structural reforms in order to attain the optimal growth path, which is estimated to be 5 percent.What happened then? So, the economic reform agenda has been suspended, reform projects such as severance pay and income tax have been canceled by the prime minister as he has been focused on the elections as they are of crucial importance for implementing the presidential system that Mr ErdoIan desires so passionately.

The flight of andldquobalanced growthandrdquo that has been obliged to fly with one wing stayed at cruising level, around 35 percent, far from the targeted 5 percent. Nonetheless, it should be emphasized that it made it possible for the current account deficit to be put on the path to be lowered, at least.

This is not satisfactory for Mr ErdoIan, who wants a revival in domestic demand as the final electoral deadline, the general elections, approaches. His open defiance regarding the conduct of monetary policy and his growing interference in other economic institutions must be construed as indicators of his insistence that economic policies be changed.

To be continuedandhellip.

SOURCE: Today’s Zaman