Low level of domestic savings in the Turkish economy, significant share of advanced economies in our exports, sensitivity of our exports to global economic cycles and deterioration in expectations of the private sector have caused a sharp slowdown in economic activity. However this contraction did not last long and Turkey has become one of the countries that have rapidly recovered from global turmoil. In other words, unlike previous crises, the Turkish economy has resisted global turbulence well owing to its structural transformation and policy implementations that have been underway since 2001. The main reasons for this resistance are the resilience gained from the implementation of a floating exchange rate regime, the robust structure of our banking system, counter-cyclical monetary policy implemented before and during the crisis and the room for maneuver provided to public finance by the fiscal discipline observed in the pre-crisis period. These factors, coupled with the subduing effects of the crisis, have promoted an earlier and stronger recovery in the Turkish economy, compared to that of the global economy. Accordingly, since the height of the crisis, by mid-2009 Turkey’s GDP and industrial production have increased by 11 percent and 21 percent, respectively, while the unemployment rate has dropped by approximately 3 percentage points. Although the level of production is still below its pre-crisis level, we expect that it will exceed this level in 2010. Meanwhile, we envisage that it will take an extended period for the labor market to recover.

Our currency did not mark a notable change against emerging market economies competing with Turkey in the exports markets. In this respect, the relatively stable course of the real exchange rate index compared to developing countries underpinned the maintenance of Turkey’s competitive power in foreign trade. As is the case across the world, the Central Bank’s decisions on monetary and exchange rate policy also affects the economy as a whole in Turkey. Under a fixed exchange rate regime, it is possible to control the nominal level of the foreign exchange rate. Nevertheless, under free market conditions, whatever the exchange rate regime and exchange rate policy are, it is impossible to control the real exchange rate level. The real exchange rate level will ultimately move towards the long-term balance level according to the structural features of the economy. In an environment of pressurized nominal foreign exchange rate, this movement will emerge by the changes in the prices of goods and services; i.e. inflation. In countries like Latvia, Estonia, Lithuania, Bulgaria, where a fixed exchange rate regime was implemented, this was experienced before the global crisis and these countries faced the problem of high inflation. We foresee that the distinguishing characteristics of countries will come to the fore in the upcoming period and currencies of those countries with lower risk, stronger economic and financial fundamentals and high growth potential are expected to perform better. Should macroeconomic stability be maintained and structural reforms be put into effect, Turkey will also have a place among these countries.