Turkey is tackling an economic turbulence driven mainly by massive speculative attacks on its currency (Turkish Lira). With all their efforts, the economic management team has been taking necessary steps to rebalance the Turkish economy. Two weeks ago the Central Bank of the Republic of Turkey (CBRT) raised the policy interest rate by 625 basis points, surprising financial markets that expected around a 400 basis points hike. The CBRT sent a strong signal that it will maintain a tight stance in monetary policy, ending futile discussions about central bank independence.

After this monetary policy decision, all economic agents held their breath on hearing about the path of fiscal policy that the government will follow in the medium term. The New Economic Program (NEP), which includes macroeconomic targets and fiscal policies to be implemented for the 2019-2021 period, was announced by the Minister of Treasury and Finance Berat Albayrak last Thursday. The initial reactions from the business sector and financial markets for the announced plan are positive, emphasizing that the NEP provides a consistent, realistic and remedial road map for the medium term.

The NEP clearly shows that the first priority of the government in the medium term is to re-balance the economy by slowing down inflation and the current account deficit. To achieve this, the government is determined to implement a more stringent fiscal policy than in the past years. Fiscal policy will be more coordinated with monetary policy over the next three years.

The government decided to reduce some public expenditure items, which are waste and not indispensable, and to collect more revenues from specific areas. These steps are expected to save 76 billion lira (around 12 billion dollars) in public finance. Expenditures on official cars, housing and social facilities will be cut down. Due to drying global liquidity conditions and high interest rates, investment projects for which tender processes have not been started or for which tender processes have been started but not finalized are planned to be suspended. The government targets to improve the tax collection process and widen the tax base.

All these policy actions will help reduce inflation and the current deficit to a certain extent. However, they will not be enough without more structural steps. So, the government needs to also focus on producing more structural solutions to problems. For example, as part of the comprehensive anti-inflationary program, the Product Monitoring Mechanism, in which price fluctuations in food products will be closely monitored by using big data and advanced analytical methods, will be implemented. To deal with the current account deficit in a sustainable way, industrial policies will become more selective, giving more weight to promising sectors, such as pharmaceuticals, petrochemicals, energy, machinery-equipment and software, in channeling public incentives.

By doing so, Turkey can increase value-added and productivity growth, reduce its dependency on imported high-tech intermediate goods and services, and increase its share of high-technology exports. This will help Turkey not only to keep its current account deficit under control, but also increase long-term economic growth.

Unfortunately, tight policies aimed at bringing the economy into a stable path again have some side effects. According to the NEP, Turkey will be highly likely to experience modest economic growth figures below its real potential and high unemployment rates. Weak domestic demand and investment conditions, caused by high interest rates, deterioration in expectations and the depreciation of the Turkish Lira, will cool down economic growth, and in turn increase unemployment rates.

It is important to note that switching to a tight fiscal stance does not mean that the public sector will be out of the economic equation. Turkey does not need to implement strict austerity measures, as the Southern European countries did during the global financial crisis. It needs to reduce redundant government expenditures and wipe out non-effective tax exceptions and other incentives. Thanks to its low level of public debt, the government has fiscal space to provide financial help to firms and industries that are productive and key for the future of the Turkish economy, while maintaining fiscal disciple (not allowing the public deficit-to-GDP ratio rise above 2 percent). For example, in his presentation, Albayrak clearly indicated that if needed, a comprehensive plan will be introduced to strengthen the capital structure of the banking system further and to provide external finance to the real economy at affordable rates. The Development Bank for Turkey will be restructured to offer new external financing opportunities to promising firms and sectors.

Yes, it is important to reveal such a program to improve perceptions regarding the stability and rationality of economic governance, but it is much more crucial to show the implementation of the program. The eyes of all economic agents will be on the implementation of this program. The progress made under this plan will be monitored in 3-month periods by the Public Finance Transformation and Change Office, a new governance establishment for budget discipline. If the NEP is implemented properly, it will not be a surprise for Turkey to regain macroeconomic stability and to grow again at a level close to its long-run potential.

The Turkish economy has been going through a severe financial attack – palpably waged by the U.S. – for some time now. The tweet posted by Donald Trump against the Turkish Lira over Turkey not releasing Brunson is now well known. The remarks of Trump’s social security adviser, John Bolton, are equally “illuminative” regarding the nature of what has been going on:

“This crisis could be over instantly if they [Turkey] did the right thing as a NATO ally, part of the West, and release pastor Brunson without condition.”

It is apparent that the fundamentals of the Turkish economy are strong and that there is no justification whatsoever for such a slump in the Turkish Lira with relevant “figures” such as public debt to GDP and external debt to GDP ratios.

Despite this fact, most Western media outlets have been extremely biased in their coverage regarding Turkey and the Turkish economy. For them, the Turkish economy is not in good shape at all and the plunge of the Turkish Lira is all Turkey’s fault. However, they badly fail as they try to support and underpin their allegations regarding the Turkish economy. For the most part, they resort to political rhetoric, and not relevant economic data. And when they seldom try to support their arguments with numbers, they cherry-pick the data that is congruent with their “fabricated story” regarding the Turkish economy.

Take “short-term foreign exchange liabilities of nonfinancial firms” in Turkey. Some of these media outlets address this ratio to show how the Turkish economy and Turkish firms are vulnerable to external shocks. However, they curiously fail to mention the other side of the story: “short-term foreign exchange assets of nonfinancial firms.” It is apparent that the liability side does not provide the full picture without mentioning the asset side. This is bad journalism to say the least. Then what is the truth? The truth is that the short-term financial assets of Turkish nonfinancial firms are 6.5 billion dollars higher than their short-term financial liabilities!

More to the point, they consistently fail to mention the exchange rate position of the Turkish financial industry, which is one of the most critical figures. What this figure tells us? It is that the Turkish banking sector has around 2 billion TL surplus of net foreign exchange position! Moreover, the capital adequacy ratio for the banking sector in Turkey is over 16 percent. So, it is apparent that the Turkish banking industry is well-hedged and in a rather good position.

These media outlets never mention the public debt to GDP ratio in Turkey, which is 28 percent, and is one of the lowest in the world. They also fail to mention that gross external debt to GDP in Turkey is 53 percent, which is not too low, but not too high either. There are numerous countries where this ratio is much higher than Turkey, such as France (213 percent) and the U.K. (313 percent).

On the other hand, there is one figure that Turkey cannot be proud of, and that is the current account deficit to GDP ratio. Indeed, Turkey has been running relatively high current account deficits for almost two decades thanks mostly to global liquidity abundance and strict monetary policy (particularly between 2002-2008) by the Central Bank of Turkey. In addition, we should add that Turkey has a vibrant and energetic economy to which investors around the world are naturally attracted. The average economic growth rate between 2002 and 2017 was 5.7 percent, which amounts to the doubling of the Turkish economy in just 16 years.

Biased media outlets sometimes try to justify the plunge of the Turkish Lira by appealing to the current account deficit ran by Turkey in hindsight. However, the current account deficit in Turkey did not emerge overnight. More importantly, what the Turkish Lira is experiencing now is not a “correction.” It is much, much more than that. For a currency to depreciate as sharply as the Turkish Lira did, that country must have rather weak economic fundamentals. On the contrary, the Turkish economy and financial industry are strong and robust.

In addition, the Turkish current account deficit to GDP ratio was much higher between 2010-2013 than it is now. The current account deficit in Turkey was already bound to decline due to the inevitable depreciation of the Turkish Lira, as well as other currencies around the world, against the U.S. dollar, as global liquidity abundance has been coming to an end slowly but surely since 2014. Indeed, this is what correction looks like.

One final comparison. The current account deficit to GDP ratio in the U.K. (over 5 percent a year) was considerably higher than that in Turkey between 2013-2016. As of 2017, this ratio was 4 percent for the U.K. I should also add that the external debt to GDP ratio in the U.K. is an incredible 313 percent. This is only 53 percent in Turkey. So? There are no Western media outlets talking about an “imminent” financial crisis in the U.K. Why? Cherry-picked economic data, for a cherry-picked country, Turkey, for clearly political grounds.

The Turkish economy grew by 7.4 percent in 2017, ahead of China and India, ranking first among the G-20 countries. However, there are some concerns within and outside of Turkey regarding whether the Turkish economy has been overheating or, quite the reverse, whether an economic recession is imminent. These concerns are mostly unsubstantiated.

First, a 7.4 percent of economic growth rate is not too high to justify the overheating thesis, particularly when compared to the long-term average economic growth rate of Turkey (4.7 percent). Moreover, one can argue that the one-quarter slowdown of the Turkish economy in the immediate aftermath of the failed coup attempt has been compensated by the above-average economic performance in the following year.

Second, given the current economic outlook of Turkey, the suggestion of an economic recession could be much more of wishful thinking or scare mongering rather than an informed prediction about the economy. That said, the Turkish economy has its own weaknesses (as well as strengths) as do other economies. Talking about existing economic weaknesses – such as the relatively high current account deficit – as a possible cause of an imminent economic recession, therefore, is not satisfactory at all and lacks a coherent internal logic: Why now? Given that Turkey has had a relatively high current account deficit for the last two decades, she has experienced no economic crisis, apart from the global financial crisis, which emanated from outside and which Turkey recovered more than completely and did so very fast.

There is no perfect economy in the world and no country needs a seamlessly-working economy to avoid a recession or a crisis. What is needed is a relatively healthy economy and the current economic outlook of Turkey does not show any significant sign of unhealthiness. Actually, quite the opposite: The Turkish economy showed its resilience time and again after 2001 and the economic performance of Turkey in that period is quite good, particularly given the global economic situation in the last decade and the continuing hangover of the 2008-09 global financial crisis for a quite number of countries. Actually, given what Turkey has gone through since 2013 in the political sphere, one can easily conclude that the Turkish economy has performed above standards. Therefore, one needs a very good explanation as to why Turkey should fall into a recession in order to be credible.

Another factor concerning some regarding the Turkish economy is the devaluation of the Turkish Lira against the U.S. Dollar and Euro. Between November 2016 and November 2017, the Turkish economy suffered three distinct financial attacks, which resulted in an elevated volatility in the financial markets and rise in the inflation rate to an extent, besides devaluation. While these factors certainly made a dent in the Turkish economy, their scope was quite limited by nature. Volatility and inflation rates can increase just once after a financial attack and these variables return to their normal levels after a while. The marginal efficacy of financial attacks decreases to a great extent with each additional attack.

Some argue that the devalued Turkish Lira could be a real headache for the Turkish economy in the near future. While there are certainly some downsides of a devalued currency both in the short and long run, there are also important upsides. In addition, given that Turkish banks and firms are in a good shape in terms of their foreign exchange position, thanks to a solid financial infrastructure in Turkey, the downsides of the devaluation of the Turkish Lira is quite limited.

Moreover, a developing country such as Turkey needs not an over-valued currency but certainly an undervalued currency. It should be noted that the Turkish Lira had been tremendously overvalued against the Dollar and Euro in the 2000s up until a couple of years ago thanks to the abundant global liquidity and tight monetary policy in Turkey. Only with the dwindling of global liquidity to a certain extent and with – paradoxically – the aforementioned financial attacks, the Turkish Lira has returned a much more balanced level against the Dollar and Euro. Therefore, there is no reason to be afraid of “normalcy.” Actually, it is the overvalued currency a developing country should be avoiding.

All in all, taking Turkey’s economic history and performance as a guide, with all her weaknesses, the prospects of the Turkish economy are relatively high.

Last week the Financial Times published an article implying that the Turkish economy is overheating. The concept of “overheating” may not be well known by the public, just because the economic press rarely uses it. So, let’s start with defining the term. According to Investopedia, “an overheated economy is one that has experienced a prolonged period of good economic growth and activity that has led to high levels of inflation (from increased consumer wealth).” In his blog (EconWeekly) Francisco Torralba, a senior economist, lists the symptoms of an overheated economy as: “increasing growth of credit to the private sector; rising growth of asset prices, including real property prices and equity prices; a decline of the current account balance (declining surplus or widening deficit); a decline in the national saving rate; above-trend growth of private investment or consumption; lower-than-average (and possibly negative) real interest rates; increasing external net financial inflows; above-trend currency appreciation; a decline in foreign exchange reserves; and above-trend output growth and below-average unemployment.” Thus, if a country experiences a majority of these symptoms, it is called an overheated economy.

The current inflation rate in Turkey is mostly driven by supply conditions. This does not meet the main symptoms of overheating. Inflation has been high for the last 15 months. Inflation figures rose to two-figure digits due to high food and energy prices, and the depreciation of the Turkish Lira. High food prices are mostly caused by supply side problems in agriculture and animal husbandry. Due to Turkey’s high dependency on imported intermediate goods, depreciation of the TL increases the cost of production. Raising oil prices, along a weak TL, also increases the costs of producers in manufacturing industry. As a result, the producer price index has been rising faster than the consumer price index since the end of 2016. All these indicate that the Turkish economy is experiencing a cost-push (supply side) inflation.

Having a typical demand-pull inflation needs a credit boom. Yes, it is true that credit growth surged in the first half of 2017 mostly due to the positive effect of the Credit Guarantee Fund. However, credit growth has been normalizing since then. Besides, the Turkish banking system gave credit mostly to the private sector, not to consumers. The growth rate of commercial credits was higher than consumer credits figures last year. Therefore, there is no strong expansion of consumer credits, which would cause the economy to overheat by reviving demand too much.

What about the current account deficit? Unfortunately, a high current account deficit is a chronical problem of the Turkish economy. Due to low oil prices and the below-average growth performance, the current account deficit was relatively low in 2015 and 2016. As expected, rising oil prices and the high economic growth have been widening the current account deficit since the third quarter of 2017. As GDP figures for the last quarter of 2017 have not yet been disclosed, and we do not yet know exactly what the ratio of the current account deficit to GDP is. Based on latest predictions, we can say that this ratio is about 5.5 percent. This is above the prediction made by the government in its Medium-Term Program 2018-2020, which was announced last September. In the past Turkey was able to finance current account deficit levels higher than this (%5.5). A current account deficit at this level will not pose a serious risk for the Turkish economy – unless there is a major break in the current global liquidity conditions, Turkey has the ability to finance this current account deficit.

Taking into account their own interests, financial elites are pressuring the government to halt expansionary fiscal policy and the central bank to raise interest rates. So it is not surprising to see news suggesting that the Turkish economy is overheating. In the end, the economic press, including the Financial Times, generally prioritizes the interests of the global financial system.

Considering high inflation and the current account deficit, it is reasonable for the government to gear down to a certain extent. However, gearing down more than necessary, as occurred in 2012, could have a negative effect on economic activity. Turkey has one of the lowest budget deficit and debt stock to GDP ratio compared to European countries. Both budget deficit and public debt figures are well below the Maastricht criteria. Besides, the contribution of public spending to economic growth this year is expected to be less than figures in 2017.

Current market interest rates are well above the level that will cause credit growth to accelerate. The central bank has no room for action to loosen its monetary policy this year. In addition to this, compared to 2017, the Credit Guarantee Fund will contribute less to credit growth this year.

It seems very unlikely that the conditions that might cause the Turkish economy to overheat this year will come out. The Turkish economy is expected to grow this year at a level close to its potential growth (%4.5-5). High current account deficit and inflation are two main problems for the stability of the economy. However, the rise in these two variables is not due to a sharp increase in demand, which is the usual suspect of an overheated economy. Reducing the current account deficit and inflation, and making high economic growth sustainable require supply-side structural reforms. These reforms might also prevent such news from perplexing financial markets.