By Alina Lehtinen for Southeast European Times in Istanbul -- 14/06/11
Experts say the brakes need to be put on an overheating economy. [Reuters]
Now that the vote is over, the government faces a host of challenges in Turkey's overheated economy, including a burgeoning current account deficit, rising inflation, and high unemployment rates.
Okan Konan, 24, a college graduate, has spent a year searching for a job. He is one of the many under and unemployed youth in Turkey. With an unemployment rate of 11.5% and a youth unemployment rate over 20%, the next government faces the challenge of providing the tens of thousands of youth who enter the work force each year with meaningful and productive employment.
A lack of jobs, however, is only one of many economic problems the AKP will face in its third term in power.
Experts are concerned by the fast deterioration in the current account deficit, now at 8%. Last week, ratings agency Moody's named it as one of the largest risks for the Turkish economy.
A current account deficit occurs when a country's total imports of goods, services, and transfers exceed its exports of goods, services, and transfers.
"Turkey's current account deficit has reached new record levels and is likely to head even higher in the rest of the year," said Chief Economist from ING Bank Turkey, Sengul Dagdeviren. "This implies that in order to sustain current growth levels, the country's need for foreign capital is rising rapidly."
Although exports have been on the rise, they have not been able to keep up with rapidly expanding imports. In an effort to stop the flow of hot money, the government lowered interest rates last year, which caused an expansion of consumer credit, increased domestic consumption, and inflationary pressure.
The import bill is also on the rise due to historic high commodity prices -- and a reliance on imported oil -- many of which are used as inputs in the export sector.
The overheating economy is also facing inflation, with the monthly inflation rate in May (compared to April) 2.24%, the highest since October 2008. Meanwhile, the inflation rate in May, compared to the same month last year (headline inflation), was 7.17%.
However, a chief economist at BGC Partners, Ozgur Altug, doesn't see view that as a special source of concern, because it was caused by a seasonal increase in food prices.
Currently, the Central Bank's end of the year inflation forecast is 6.9%.
Still, with world food prices and commodities reaching record highs, core and non-core inflation remain worrisome, especially as it affects consumers and industries that rely on imported commodities.
Now that the elections are over the government will need to turn its eye to the economy. How AKP will tackle these issues is yet to be seen. However, experts agree that much has to be done to stabilise the economy.
According to Dagdeviren, one of the largest challenges facing the new government will be to take necessary precautions against the excessive current account deficit. "I expect more fiscal tightening in this regard," he said.
Erste Group economist Ozlem Derici agrees. "Considering the current account balance as the main risk area, we would expect AKP to focus on financial stability first, probably by imposing additional measures that would support the Central Bank in its efforts to narrow down the current account deficit."
"In the long term, structural reforms like lowering the dependency of exports to imports for increasing saving rates would be needed to secure a higher level of average growth," Derici said.
Source: SETimes.com
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