Turkey to see muted economic growth in 2022

By Nibal Zgheib

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  • Turkey’s GDP growth forecast to fall sharply to 2 per cent in 2022 from 11 per cent in 2021
  • Russia’s war on Ukraine is denting tourism revenue and boosting Turkey’s import bill
  • Economic growth is expected to recover somewhat to 3.5 per cent in 2023

The European Bank for Reconstruction and Development (EBRD) is predicting a marked slowdown in Turkey’s economic growth to 2 per cent in 2022 from 11 per cent in 2021 in the Bank’s latest Regional Economic Prospects report, published today. 

Although the weaker lira should support Turkey's exports, activity is expected to slow significantly compared to the stimulus-driven recovery in 2021 and the impact of Russia’s war on Ukraine is likely to be felt via lower tourism revenues and higher commodity prices leading to an increase in Turkey’s import bills.

There are significant downside risks to today’s forecasts, including an escalation in geopolitical tensions and spillover effects from aggressive policy tightening in developed economies.

Turkey’s large short-term external debt also remains a concern, particularly as the cost of servicing that debt has increased dramatically with the depreciation of the local currency.

The EBRD expects economic growth to recover somewhat to 3.5 per cent in 2023, driven by a rise in household and government spending ahead of a planned election in June 2023.

The poor credibility of the Central Bank of the Republic of Turkey (CBRT) has fostered expectations of further price rises. The combination of negative real interest rates, rapid currency depreciation and rising global commodity prices pushed inflation to 70 per cent in April and year-end inflation forecasts standing around 55 per cent.

On the positive side, the EBRD report says, Turkey’s banks remain well capitalised, with a headline non-performing loan ratio of 3 per cent. Public finances remain an anchor of the economy, with a debt-to-GDP ratio of just 38 per cent.

However, Turkey’s new FX-linked deposit schemes have shifted exchange rate risk to the public coffers, creating a potentially sizeable contingent liability, the report says.

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