(ECO) TURKEY AVOIDED FULL-FLEDGED FINANCIAL CRISIS THANKS TO STRUCTURAL REFORMS, EU.

BRUSSELS, Nov 16, 2009 (TUR) -- The European Commission said despite a real economy severely hit by the ongoing financial crisis, Turkey managed to avoid a full-fledged financial crisis, thanks to structural reforms implemented in the recent past.

The European Commission which published its assessment of the 2009 Progress Report on Turkey and other candidate and negotiating countries --Progress towards meeting the economic criteria for accession-- said "the earlier regulatory and supervisory reforms in Turkey are paying off and a full-fledged financial crisis has been avoided so far."

It said Turkish economy contracted following the drop of both external and domestic demand, in particular investment noting however that the impact of the crisis was largely limited to the real sector of the economy also due to previous structural reforms and countercyclical measures.

"Over the past several years, Turkey had successfully implemented a strong stabilisation programme and the resilience of the Turkish economy benefited from in-depth structural reforms in many key areas, including banking, enterprise restructuring and privatisation, education and energy.

However, the lack of more solid and credible fiscal anchors, in combination with the spending increases introduced since early 2009 to address the consequences of the crisis have increased uncertainty and may adversely affect the economic recovery. Fiscal consolidation has been reversed due to the ongoing crisis and the fiscal stimulus measures," said the European Commission's assessment.

The report said the negative effects of the global crisis on Turkey have gradually become evident underlining however that, almost all economic indicators as of mid-2009 showed that the economic contraction was bottoming out after it peaked in the first quarter of 2009.

It said, "the crisis affected adversely almost all sectors of the economy. The industry was particularly hit by a large fall in domestic and mainly in external demand, including for cars and electrical appliances. On the demand side, private consumption and particularly private investment were affected severely by the crisis.

Unemployment increased significantly. In a difficult economic environment, the structural reform process has somewhat decelerated, in particular in the first half of 2009. The absence of credible fiscal plans and anchors added some uncertainty to the investment climate."

As regards the economic criteria, the EU said, Turkey was a functioning market economy noting that it was capable of coping with competitive pressure and market forces within the Union in the medium term, provided that it continued implementing its comprehensive reform programme in order to address structural weaknesses.

It said the government managed to maintain consensus on economic policy essentials under the current challenging circumstances and it accommodated demands for expansionary policies to counter the marked economic contraction and largely embedded them in a broader development strategy entailing higher public investment, job creation and sectoral reforms.

According to the report,some progress was made in upgrading the country's human and physical capital, although the economic crisis continue to represent a challenge to this process.

It said, in spite of several bouts of global financial instability, the Turkish financial sector has shown remarkable resilience.

The Commission said, Turkey diversified its trade towards new markets, thereby partly alleviating the impact of the crisis noting however that, while the anti-crisis fiscal measures cushioned somewhat the economic downturn, these measures posed the danger of putting benefits from previous years of fiscal consolidation and medium-term sustainable policies at risk if they were not withdrawn timely.

The report underlined that, in spite of various new initiatives by the Turkish government, the economic crisis was complicating the access of SMEs to finance and slowing down the sectoral transformation of the Turkish economy.

"The allocation of state aid continued to lack transparency. While market entry has benefited from the adoption of new legislation, there are still obstacles in market exit. The legal environment, and in particular court procedures, pose practical challenges and create obstacles to a better business environment. Turkey adopted a comprehensive action plan to reduce the informal economy, which remains an important challenge," said the report.

The European Commission said the effectiveness of the various stimulus packages introduced in late 2008 and the first half of 2009 by the Turkish government could benefit from a stronger fiscal anchor, a more credible framework and better communication and coordination.

"This will be even more important when growth resumes, and Turkey needs to present a credible and timely exit strategy from the current fiscal stimulus. Overall, under challenging circumstances consensus on economic policy essentials has been preserved; however, confidence in the government?s economic policy stance could benefit from better planning, coordination and communication," it said.

(OZG-AY)

(THROUGH ASIA PULSE)