Hot spots: Turkey.(Business Credit)

Effective January 1, 2005, the Turkish lira will be stripped of six of its zeros, meaning that one million old traits will become one New Turkish Lira (YTL). Put differently, the current exchange rate with the dollar of roughly TRL 1,460,000 per USD 1 will become YTL 1.4600 per USD 1. While this shift of the decimal point will not by itself have much practical value, other than that it will make currency calculations simpler, the authorities hope that it will have a tangible psychological impact by drawing a line under decades of rampant inflation.

The rise of consumer prices is now in the single digits for the first time since 1972. As recently as the beginning of 2002, it was still on the order of 70 percent-plus. Turkey currently has the questionable distinction of circulating the world's highest-denomination banknote, for 20,000,000 lira, but "after the turn of the year this will become YTL 20. The new lira will be subdivided into 100 kurus. Banknotes will be issued in denominations of 1, 5, 10, 20 and 50 liras.

Turkey has, indeed, come a long way toward financial stabilization in the past couple of years under the stewardship of Prime Minister Recep Tayyip Erdogan and his AKP party. But this should not cause one to lose sight of the fact that the huge public debt is not yet in reliably sustained remission. While the country so far this year has been able to raise about USD 5 billion with new bond issues abroad, thereby lengthening the maturity of some of its obligations, the amount is but a tiny fraction of the overall burden.

The aggregate debt was reported at USD 210 billion as of end-September Of this, USD 145 billion was held mostly by local investors, while USD 65 billion was denominated in foreign currencies and SDRs. Much is being made of the sharp decline in the ratio of net debt to GDP, which was as high as 95 percent in 2001 and is forecast to be down to 65 percent by the end of this year. Of the three reasons for this development, though, only the first--the government's willingness to run a tight fiscal regimen under IMF tutelage--is reasonably certain to prove lasting.

Under a three-year standby agreement that expires next February, the government has been running a primary budget surplus (before debt interest payments) equivalent to 6.5 percent of gross domestic product. It is now in the process of negotiating a new pact with the Fund, but even if the surplus target is lowered in that accord, fiscal policy, overall, will stay tight. On the other hand, the second reason for the decline of the debt ratio, namely the rapid expansion of the Turkish economy, cannot be equally counted on to persist.

Real GDP has been surging at a double-digit clip at least in part because the 2003 base for comparison is rather weak (notwithstanding that economic growth last year was 7.5 percent, after nearly 6 percent in 2002). Going into 2005, similar gains will be increasingly difficult to achieve. Moreover, much of the decrease in the debt ratio has been due to a fall in the amount of foreign obligations when these are measured in domestic lira prices. The lira gained by 17.37 percent against the dollar in 2003. So far this year, it has slipped by less than 4 percent.

Attracted by the rise of the lira coupled with high local ...