Turkey carries strong growth momentum into 2021, EBRD says

By Olga Rosca

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  • EBRD expects Turkey’s economy to grow 9 per cent in 2021 and 3.5 per cent in 2022
  • Growth supported by post-lockdown rebound in domestic demand and strong exports
  • Turkey remains vulnerable to global investor sentiment, EBRD warns

Turkey’s economy is expected to grow 9 per cent in 2021 and 3.5 per cent in 2022, the European Bank for Reconstruction and Development (EBRD) says in its latest Regional Economic Prospects (REP) report, published today.

The recovery is being supported by a post-lockdown rebound in domestic demand and strong exports driven by healthy external demand. Nonetheless, the risks to macroeconomic stability have increased.

The strong momentum that made Turkey one of the few countries globally to record a positive growth rate in 2020 continued into 2021, the EBRD report says. Turkey reported a 14.5 per cent year-on-year GDP growth rate in the first half 2021, driven by both domestic and external demand.

A pickup in tourism and a strong export performance prompted the current-account balance to narrow from a peak of US$ 36 billion in February to US$ 23 billion in August 2021. It is likely to shrink further to around 2.4 per cent of GDP by the end of the year, the Bank forecasts.

Inflation has remained persistently high and decisions to cut policy rates by a total of 300 basis points since September have caught investors off guard, as did the October decision to replace three members of the monetary policy committee, including two deputy governors.

Roger Kelly, EBRD Lead Regional Economist, commented: “Frequent personnel changes alongside a fragile external position keep Turkey vulnerable to changes in global investor sentiment. Nevertheless, high-frequency indicators suggest that activity remained robust in the third quarter of 2021 and GDP is expected to grow by 9 per cent in 2021, moderating to around 3.5 per cent in 2022.”

Risks to the forecast include further Covid-19-related setbacks; the impact of higher energy prices, given Turkey’s heavy dependence on energy imports; risks associated with a premature loosening of monetary policy; the return of inflation in advanced economies; and adverse geopolitical developments.

The EBRD has raised its broader economic growth forecast for the regions in which it invests to 5.5 per cent for 2021. While this is an upward revision of 1.3 percentage points from its June forecast after a strong performance in the first half of the year, the Bank also warns that serious threats abound.

High commodity and energy prices, tight labour markets, supply-chain disruptions and currency depreciation in some EBRD investee economies had begun to push up inflation even before the latest spike in Covid-19 infection cases.

On average, inflation in the EBRD regions exceeded its end of 2019 levels by 3 percentage points in September 2021. In response, a number of central banks in the EBRD regions have raised policy interest rates.

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