The Kapali Carsi

The best introduction to the woes of the Turkish economy

Nope, it is not one of my columns. It is an article by University of Maryland’s Sebnem Kalemli-Ozcan. Here is how my friend Murat Ucer summarized it in his Turkish economic data program Turkey Data Monitor:

Open F/X positions or so-called “currency mismatches” are always a source of concern in emerging markets.  This recent Voxeu blog by Sebnem Kalemli-Ozcan argues that they explain “the Central Bank of Turkey’s interventions to prop up the value of the Turkish lira. Given the relatively low level of reserves and the unfolding corruption scandal, it is a critical question how long the Bank can continue to do so.”

Murat also recommended two complementary readings from voxeu: “The first one provides a taxonomy of so-called “sudden stops” working with gross and net capital flows, while the other one looks at the impact of “tapering” on emerging markets.”

I was more interested by two of the “artifacts” of Kalemli-Ozcan’s article:

1. Part of the ruling AKP’s argument that there is an international conspiracy against them goes like this: “Look, we have been in power for more than a decade, and everything was fine.” Summarizing recent research, Kalemli-Ozcan explains the concept of political bubbles, where an emerging market government stays in power by delaying reforms in favor short-term fixes that will cause problems later. In fact, as a recent Capital Economics note showed, almost all the government that were subject to political unrest last year had been in power for at least several years.

2. In Turkey, we have data on total FX debt, but nothing on the sectoral distribution of this debt. Kalemli-Ozcan refers to a very useful paper by a Central Bank economist (unfortunately in Turkish), who claims, using the Bank’s non-public survey data, that 70 percent of the total debt of the construction sector is actually FX debt. As Kalemli-Ozan notes as well, construction companies usually borrow for working capital purposes, so most of this debt would probably be short-term. Scary stuff…

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