Turkey overview

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.

• The EBRD’s latest Turkey strategy
• The EBRD’s latest Turkey strategy in Turkish
• Report on the invitation to the public to comment on the Turkey strategy

Current EBRD forecast for Turkey’s Real GDP Growth in 2018 3.6%

Current EBRD forecast for Turkey’s Real GDP Growth in 2019 1.0%

The Turkish economy grew by 7.4 per cent in 2017 and 6.2 per cent year-on-year in the first half of 2018, on the back of various stimuli provided by the government, including an expansion of the Credit Guarantee Fund (CGF) and several major public infrastructure projects. However, leading indicators suggest that the overheated economy has entered a sharp slowdown in the second half of 2018. 

The Turkish lira has been extremely volatile over the past year. A lack of domestic policy clarity and geopolitical tensions, in the context of tightening of the US monetary policy and a stronger US dollar, saw the lira at one point lose over 40 per cent of its value against the dollar since the start of 2018. A series of sharp interest hikes by the Central Bank of Turkey, alongside the adoption of the New Economic Programme (NEP) and a recent rapprochement in relations with the US, seem to have stabilised the lira. Nevertheless, the economy’s heavy dependence on foreign capital means that the lira remains vulnerable. Meanwhile, the pass-through effect from the lira’s depreciation and stimulus-driven consumption growth pushed inflation to a 15-year high of almost 25 per cent in September 2018.

Economic rebalancing forced by the weak lira should help reduce large external imbalances, which arose as consumption-driven growth resulted in a rapid growth in imports, driving the current account deficit to 6.5 per cent of GDP by Q2 2018. Lately, the weak lira has led to a significant improvement in the external trade position, in turn reducing the current account deficit. However, the short term external financing requirement remains high, in excess of 25 per cent of GDP. 

The banking system, often considered a key anchor of the economy, is under growing stress. The depreciation of the lira has hit banks’ capital, and their asset quality may be impacted by both their exposure to corporates with large FX liabilities, and the effect of increased interest rates on corporate and household balance sheets, particularly as the economy slows. The Banking Regulatory and Supervisory Authority has introduced several measures to address the issues faced by banks, but there are concerns about the impact of these measures on balance sheet transparency, and confidence in the system. 

 

The lira’s depreciation and interest rate hikes will continue to impact consumption and investment in the short term, although rebalancing should see net exports make an increasing contribution to growth. A sharp slow-down in the second half of the year is expected to bring annual growth in 2018 down to around 3.6 per cent, with a growth rate of around 1.0 per cent expected in 2019. The key risk to the outlook is uncertainty regarding the banking sector but other risks include the direction of economic policy and further depreciation of the lira.

Turkey in the EBRD’s 2018-19 Transition Report

Turkey in the latest BEEPs survey