Türkiye overview

Expansionary policies undertaken in the context of the New Economic Model over the past two years contributed to a relatively strong economic performance by Turkiye, but they also exacerbated existing macroeconomic vulnerabilities. GDP growth decelerated from 5.6 per cent in 2022 to 3.9 per cent year on year in the first half of 2023. Inflation has declined from a peak of over 80 per cent recorded in October 2022 but remains elevated and is expected to increase to almost 60 per cent by the end of 2023. Furthermore, the government has posted record high fiscal deficits due to commitments made prior to the 2023 elections such as public sector wage and pension hikes and a rise in expenditures due to the earthquakes of February 2023.

 

Large external imbalances persist. Short-term external debt has exceeded US$ 200 billion and the current account deficit stands at US$ 60 billion, implying gross external financing needs in excess of 25 per cent of GDP for the coming year. Foreign exchange reserves, albeit increasing are modest in relation to refinancing needs. The appointment of officials known for their market-friendly views following the elections of May 2023 saw a shift to more orthodox economic policies. Key appointments included former Deputy Prime Ministers Mehmet Simsek and Cevdet Yilmaz, and a new governor and deputy governors at the central bank. Measures enacted by the new economic management include consecutive interest rate hikes, taking policy rates from 8.5 per cent in May to 25 per cent in September 2023, increases in taxes including raising the base rate of the value added tax from 18 per cent to 20 per cent, and a gradual unbundling of restrictive and costly regulations affecting the banking sector adopted over the past year. These developments signalled an end to the unorthodox New Economic Model adopted in 2021 and have been received with cautious optimism by the markets, as demonstrated by Turkiye’s CDS premium which has been declining from its historic peak in May 2023.

 

These steps are positive, although there is a risk that the adoption of orthodox policies may prove short-lived, as the local elections of March 2024 draw nearer and authorities may face growing pressure to sacrifice stability in favour of growth. A growth rate of 3.5 per cent is expected for 2023, declining to 3.0 per cent in 2024.