In Turkey we focus on:
- Investing in energy efficiency and renewable energy and supporting energy sector reforms;
- Improving the quality of infrastructure with the participation of private sector;
- Scaling up private sector competitiveness through innovation and improved corporate governance;
- Promoting regional and youth inclusion, as well as gender equality, to support long-term growth potential;
- Deepening capital and local currency markets.
As well as being a country where the EBRD works, Turkey is also an EBRD donor. Turkey contributes to the Women in Business programme which was launched in the country in 2014. Co-financed by the European Union, the programme supports micro, small and medium-sized enterprises owned and managed by women through improved access to finance and advisory services. The EU has committed €32.3 million and Turkey is contributing a further €5.7 million.
Current EBRD forecast for Turkey’s Real GDP Growth in 2017 5.1%
Current EBRD forecast for Turkey’s Real GDP Growth in 2018 3.5%
After growing at a below-average rate of 3.2 per cent in 2016, the Turkish economy grew by 5.1 per cent in the first half of 2017. The government has adopted a significant fiscal stimulus in 2017, notably the temporary VAT cuts in durable consumer goods and the TRY 250 billion (US$ 70 billion) Credit Guarantee Fund, which have led to a surge in domestic demand in 2017. At the same time, the adoption of a new National Accounts methodology in December 2016 served to enhance the country’s growth figures.
While the lira depreciated by 27 per cent against the dollar from July 2016 until end-January 2017, it has subsequently recovered some of its losses, reflecting both measures undertaken by the Central Bank to tighten monetary policy, and increased portfolio inflows in common with the overall trend in emerging markets. However, Turkey’s large current account deficit, extensive foreign-exchange-denominated corporate debt and investor concerns over geopolitical risks mean that the lira remains vulnerable.
This depreciation passed through to inflation, which reached double digits for the first time in five years in February 2017, well above the 5 per cent target set by the Central Bank. The Central Bank tightened monetary policy by widening its interest rate corridor and resorting to lending through its punitive late liquidity window, rather than raising the policy rate. As a result of the tightening, inflation started to decline in May 2017.
Large external imbalances remain a major vulnerability. The current account deficit has been decreasing, from 6.7 per cent of GDP at end-2013 to around 4.1 per cent of GDP at Q2 2017, due to the depreciation of lira and the declining energy import bill, on the back of lower oil prices. However, gross external financing needs are estimated to be at around 25 per cent of GDP in 2017, leaving the country exposed to global liquidity conditions.
Strong public finances and a stable banking system remain the key anchors of the economy, despite the recent loosening of fiscal policies and increase of contingent liabilities. The banking system remains well capitalized, with low levels of non-performing loans (3.1 per cent). A significant strength of Turkey is its low public debt of 28 per cent of GDP at end 2016, and low budget deficit, which stood at 1.1 per cent of GDP in 2016. However, expansionary fiscal policies adopted since the end of 2016 have rapidly expanded the budget deficit, and the government passed an act to increase the borrowing limits of the Treasury this year.
Thanks to an uptick in exports and the exceptional stimulus provided by the government, growth is expected to recover to around 5.1 per cent in 2017 before declining to 3.5 per cent in 2018. The contribution of private consumption on growth will decline due to the phasing out of stimulus measures. Increasing levels of public investment will be partly offset by sluggish private investment growth, linked to a deterioration of the business environment. Net exports are likely to increase due to the competitive exchange rate and increasing demand in key export markets.
The downside risks to this outlook for the next two years are: investor uncertainty in the context of the unstable geopolitical environment and perceived deterioration of institutional independence; faster-than-expected monetary tightening by the US Federal Reserve and moderation in global liquidity; and failure of the government to pursue structural reforms efforts which are required to enable the country to reach its long-term growth potential. On the upside, if the government introduces new stimulus with the 2019 elections in mind, this could result in growth exceeding our forecast, albeit with associated negative consequences for other macroeconomic indicators.