Yet again, the world economy is going through a difficult time. The air of mayhem in emerging markets continues to intensify as investors nervously await the critical decision from the U.S. Federal Reserve on the timing of interest rate hikes. Hence the popular interest in the million-dollar question that will determine the long-term configuration of developments in the global economy: "When will the Federal Reserve start raising interest rates?" The common expectation is around June 2015 but still any clue, any hint, pertaining to a specific answer might be worth a major fortune. The Federal Reserve's policy of quantitative easing and near-zero short-term interest rates have been the key drivers of abundant international liquidity in recent years, therefore a change of gear on that front will have an enormous impact on emerging markets. As Taha Meli Arvas stated in his Daily Sabah column, the countries that are likely to be affected the most from interest hikes will not be the typical high-risk, junk-rated developing countries, but also investment-grade countries such as Turkey whose bond yields have been steadily decreasing. As one of the more promising emerging markets from which major investors might prefer to return to their safe havens in the U.S., it is only normal that Turkey represents one of the most deeply affected emerging markets from the global developments. Commentaries that try to link the recent fluctuations with domestic factors such as the Dec. 14 operations, or President Recep Tayyip Erdoğan's statements to the EU are clearly misinformed, if not ill intentioned.
This is not to deny that the Turkish economy is still in the process of rehabilitation from the structural damage of politically motivated judicial operations on Dec. 17 and Dec. 25 of last year against the incumbent Justice and Development Party (AK Party) government. Exactly one year ago, a series of carefully choreographed judicial and security operations played havoc with the country's democratically elected, legitimate administration. Under the guise of unveiling systemic corruption, a smear campaign was conducted to discredit the government and denigrate its leader, Recep Tayyip Erdoğan, and his family through an international social media campaign. Credit rating agencies played their part by exaggerating domestic political risks and economic sensitivities, thereby reducing the attractiveness of the country for new investments and making the financing of major infrastructure projects more difficult. Finally, the Turkish Central Bank could not manage the critical period effectively and overreacted with a belated but higher than required interest rate hike of 5.5 percent that could not be withdrawn throughout the year due to the negative global financial conjuncture. The end result was financing problems for new investments, moderate growth and increasing unemployment. However, prudent macroeconomic management and robust financial governance architecture prevented a potential slide into a crisis trajectory.
Nevertheless, critical political thresholds such as the March 30 local elections and Aug. 10 presidential election passed while keeping political and economic stability in the country intact. The response of the AK Party government to the falling growth was the unveiling of an action plan for structural transformation that included a clear division of labor and deadlines to increase productivity and induce high value added production. In the wake of the most recent fluctuations, it must be stressed that Turkey's markets are robust enough to withstand international fluctuations and can remain stable in the long term. In the coming months expectations and speculation about the timing of the Federal Reserve's interest rate decision might spur occasional jumps in the exchange rate as well as an outflow of capital similar to other emerging markets. However, there are currently no systemic risks in terms of public financing, servicing internal and external public debt or maintaining the current account deficit that is already shrinking due to falling oil prices. Obviously, regulatory bodies must be vigilant against fluctuations that might occur as a result of potential speculation, but Turkish markets are strong enough to endure and adapt to potential international shocks.