Turkey ranks among the top seven sizzling economies currently with a high risk for inflation, a fast flow of hot money and an alarming current account deficit, according to the top economy advisor in U.S. President Barack Obama’s administration.
“There is so much short-term foreign capital rushing into emerging countries including Turkey,” said Laura Tyson, a member of the U.S. President’s Economic Recovery Advisory Board, during an interview yesterday at the “We carry the economy” meeting organized by Turkey’s Aras Cargo based in Istanbul.
The rapid growth in emerging economies, nearly three times larger than developed countries, contains some lingering risks, she said.
“Turkey has not developed a major export strategy that is as diversified as in Asian countries,” said Tyson, adding that domestic-demand-driven economic growth might be a risk for Turkey considering more than 60 percent of its export is to debt-hit European economies.
Argentina, Brazil, Hong Kong, India, Indonesia, Turkey and Vietnam are among the sizzling economies as of the end of the first half of this year, according to Tyson.
“The slowdown in recovery this year has forced many economists around the world to bring down their predictions,” said Tyson, adding that many upped the risk forecast on the global economy. She said the uncertainty in global markets and in the Middle East played a significant role in the rise of the commodity prices, oil and food in this year.
Economies that rely on oil imports will have serious problems in the long run if their current account deficits cannot be financed in the meantime, according to her. “Importing oil does not put the same pressure on an emerging country and a developed country, as an emerging country relies more on oil imports than the other to keep its growth sustainable,” said Tyson.
“I think the authorities in Turkey understand the importance of controlling inflation and the hot money flows into the country,” said Tyson, adding that unorthodox steps by the Turkish Central Bank had worked well so far. Compared to many countries in Europe, Turkey has no debt problem, she said, adding that the country still needs approximately $75 billion to finance its skyrocketing current account deficit. “Turkey is not isolated from U.S. and European economies, and it is likely to feel the shock of a new crisis,” Tyson said
“Turkey also does not have a large reserve of foreign exchange,” she said.
While talking about the currency wars often discussed among leading economists, she said, “I do not think the Chinese yuan is overvalued,” said Tyson. “The competition between the U.S. and China before the global economic crisis came back and it’s not a consequence of the crisis,” she said while backing Federal Reserves’ August decision to keep the interest rates “exceptionally low” until at least 2013. “The Federal Reserve is doing the right thing now. They do not have an aim of pressuring other currencies,” said Tyson.
Crisis-hit European economies suffering under heavy sovereign debts might experience a second recession, which could trigger a second global economic crisis, Tyson said. “Many said the U.S. mortgage sector was not large enough to trigger a crisis before, and it did eventually. Now I say that European sovereign debt is big enough to cause another crisis.”Tyson was the chair of the Council of Economic Advisers between 1993 and 1995 in the Clinton administration and the president’s national economic adviser between 1995 and 1996.