Roubini advises IMF deal for Turkey
Posted by meb at October 5th, 2009
Turkey does not ‘technically’ need a standby agreement with the International Monetary Fund, according to Professor Nouriel Roubini, who was among the first to predict the current global crisis. But, he says, a deal would give confidence to investors. ‘Instead of just waiting for a recovery in the European Union, Turkey should also diversify its export markets,’ he says
The collapse in European Union demand coupled with receding foreign capital inflows makes a standby agreement with the International Monetary Fund desirable for Turkey, according to New York University Professor Nouriel Roubini.
Roubini, who predicted the crippling financial crisis as early as 2006, told a crowded audience in Istanbul that a global recovery will probably be U-shaped – slow and with low growth rates for years. Speaking at an İş Investment-sponsored event Friday evening, the economist, dubbed “Dr. Doom,” said unprecedented central bank interventions helped mitigate the “systemic risk” to the world economy but that downside risks remain.
“The Turkish economy was fundamentally sound in the eve of the crisis,” he said. “But then the contagion came, resulting in a collapse in European Union demand [for Turkish goods]. The corporate sector halted capital expenditure investments. Turkey is a very open economy and its recovery depends on the recovery of the eurozone.”
Despite this, Turkey should continue macro-structural reforms and “go back to a sound fiscal framework,” Roubini said, adding that there might be some questions about whether the government’s recently announced medium-term economic program would be enough.
Under these circumstances, a deal with the IMF would be “positive for investor sentiment,” he said. “Technically, there is no need for such a deal. But it would signal that a robust policy is in place.”
The structural reforms Roubini advocated included reducing taxes, reigning in the unregistered economy, providing labor flexibility and reforming the social security system. “Your recovery demands on two things,” he said. “Sound domestic policy and good luck.”
Instead of just waiting for a eurozone recovery, Turkey should diversify its exports and head toward the markets in the Middle East, Central Asia and north Africa, Roubini added. “I am moderately optimistic on Turkey,” he said.
Shape of the recovery
Reflecting on the U.S. economy, the Istanbul-born economist predicted a U-shaped recovery. A double-dip recession, namely a W-shaped one, is “not my main scenario, but downside risks to that end remain,” he said. If the recovery would be “anemic,” the losses stemming from commercial real estate, credit cards, auto loans and student loans would be much higher than the $3.4 trillion predicted recently by the IMF, he said.
An exit from the current stimulus policy would be “very difficult,” as the massive rally in all asset classes since March clouds predictions, according to the renowned professor. “How much of this [rally] is driven by fundamentals and how much of it comes from [excessive] liquidity?” he asked, recalling that the fiscal easing by policy makers amounts to a massive $10 trillion. “Japan exited too soon in 1998 and had a double-dip recession.”
The current rally might end in a “correction,” he said. “Assuming a weak recovery, flow of macroeconomic news would be worse than expected. In U-shaped recoveries, surprises are negative rather than positive.”
Weak consumer demand
Recalling that official unemployment in the U.S. has reached 9.8 percent while real unemployment is at 16.8 percent, Roubini said this is a key reason why growth would be “well below potential” for the next few years. It is not only job losses that slash consuming power of U.S. citizens, he said, recalling cuts in wages and hours worked in many workplaces.
Roubini named other reasons for anemic growth as weakness in credit growth, the painful debt structuring in the corporate sector that hampers expansion, a large budget deficit that would hit private demand and a large current account deficit.
“Places such as the U.S., Britain, the Baltics and Dubai ran large current account deficits,” he said. “While countries such as Japan, Germany and China ran large current account surpluses. China was the producer of last resort while the U.S. was the consumer of last resort. The glut of capacity in the U.S. economy and weak demand will also result in a fall in global aggregate demand.”
Roubini was more bullish on emerging markets. “They don’t have financial leverage and liabilities,” he said. “They have cleaned up their financial systems [before]. Their potential growth rate is much higher, and they will recover at a reasonable rate next year.”
But these are not “engines of global growth,” he added. “China’s total gross domestic product is at $3 trillion, a fifth of the U.S. GDP. A total of 2.2 billion ‘Chindian’ citizens spend $1.6 trillion annually, while 300 million U.S. citizens spend $10 trillion.”
source: Hurriyet daily news
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