Turkey – economy doing OK but could try harder
Published 18 December 2014
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0.1 Summary
Growth slows to lower-than-expected 1.7 % in Q3 2014. Government lowers 2015 forecast to 3.3%. Falling oil prices a bonus to energy-dependent Turkey; but may not be enough to boost growth much unless Government seizes challenge of structural reform after 2015 elections.
0.2 Detail
We have previously reported that Turkey’s economy grew by 3.3% in the first six months of 2014. GDP figures published on 10 December showed a contraction to 1.7% in Q3, giving overall growth so far in 2014 of 2.8%. The market forecast for 2014 is now 3.2%. The government forecast has been revised down to 3.3% from 4%.
The 1.7% figure disappointed analysts, who had forecast 2.9% Q3 growth. Standard Bank analyst Tim Ash said the current account deficit had narrowed in 2014. The figures suggested that the rebalancing story was continuing, with net foreign demand contributing to growth. Other analysts argued that a 4.9% contraction in the agriculture sector and weak private and public investment had caused stock depletion in Q3. Deputy Prime Minister Babacan said the growth figures underlined the need for structural reforms for Turkey to achieve sustainable growth.
The October IMF article IV Report highlighted the challenges and risks Turkey faced to competitiveness. The IMF said Turkey’s low national savings contributed to external imbalances, leading to risk associated with capital inflows. Monetary policy should be focussed on inflation targets, while the introduction of macro prudential policies would protect Turkey from financial instability. Turkey should implement structural reforms to avoid the middle income trap.
On 9 October the government released its Medium Term Economic Programme (MTP), which outlined the macroeconomic targets and economic policy framework for 2015-2017. The forecasts were lower than in the previous MTP, with annual growth rates estimated at 3.3% and 4% for 2014 and 2015 respectively. The MTP also raised inflation forecasts from 5.3% to 9.4% in 2014 and from 5% to 6.3% in 2015; and raised forecast unemployment to above 9% for both years.
The main credit ratings agencies have maintained their sovereign ratings and outlook for Turkey. Moody’s said Turkey’s sovereign credit profile was at risk because of the weaker growth environment; and that Turkey’s exposure to volatile foreign capital flows had been heightened by regional and domestic political risks.
0.3 Comment
Lower growth in 2014, combined with the IMF’s outlook and the cautious forecasts in the MTP, make for a less optimistic scenario for 2014 full year GDP and for 2015. Together with the lack of political reform appetite ahead of the 2015 general elections, the Turkish Government’s economic growth targets for 2023 (e.g. to become a top 10 world economy) look increasingly challenging. Based on the IMF’s revised predictions, Turkey in 2023 will be the world’s 17th largest economy in 2023 – important and respectable and rich with opportunities for British business, but about the same as now.
0.4 Disclaimer
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