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Un unsustainable mechanism: Hot Money for Turkey
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As the wise investor knows very well, the recent boom in the emerging markets is the product of expansionary fiscal and monetary policies implemented in the United States and Japan. Some striking facts can help us understand better how exceptionally lax these policies were:
• In the US, the broad money supply M3 increased 31 % during the three years 2000-2002.
• Again in the US, the Fed Funds Rate came down to 1 % in 2003, the lowest level since 1940's.
• In Japan, the monetary base expanded 30 % between June 2001-June 2002. Thus, the ratio of monetary base to nominal GDP rose to 17 %, compared to 6 % in the US. At the same time as this expansion started, Japanese interest rates came down to near-zero levels, and are still there.
While the financial markets that were coming to a standstill in 2000 were buoyed by this excessive liquidity expansion, and an impending recession was thus avoided, the inevitable by-product was record-low financial returns in developed countries. Therefore, some of this extremely-low-cost extra liquidity eventually found its way into the emerging markets and created the recent boom. During the earlier three-year period 1998-2000, cumulative net financial flows into emerging markets had totalled USD 482 bio. During the three-year period 2003-2005, this figure nearly doubled, rising to USD 902 bio. Thus, the emerging markets boom that started in 2003 has been a purely self-propelled movement of international hot money.
Turkey has been among the main beneficiaries of ample global liquidity.The difference between capital inflows and Turkey’s current account deficit, a good USD 32 bio (Turkey’s GNP stood at USD 180 bio in 2002) accounts for every single achievement in the Turkish economy since then: The rapid fall in inflation from 70’s to single digits, the fall in T-bill rates from 70’s down to 13, a boom in consumer credits and consequently in the housing market, a doubling-up of the dolar-denominated GNP within 3 years, and greatly improved debt-to-GNP ratios... All these are the result of a sharp appreciation in the real value of the Turkish Lira, which was made possible by strong foreign capital inflows.
Parallel with the appreciation of the Lira, Turkey’s current account deficit has risen nearly every single month since December 2002. As of the end of April 2006, Turkey’s current account deficit stands at USD 27 bio, an amount equivalent to 7 % of GNP. Clearly, this was an unsustainable mechanism. |
| Tarih
: 07.09.2006 |
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© 2006 Mert TOKER All Rights Reserved. |
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