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 2018 4.4%
Current EBRD forecast for Turkey’s Real GDP Growth in 2019 4.2%
After a challenging year following the failed military coup attempt in 2016, the Turkish economy grew by 7.4 per cent in 2017 as the government enacted a series of stimulus measures, most significantly an expansion of government-backed credit guarantees to SMEs under the TRY 250 billion Credit Guarantee Fund (CGF). However, the rapid pace of growth – significantly in excess of potential growth of 4-4.5 per cent – has seen inflation increase to double figures and a widening of the current account deficit to around 6 per cent of GDP. This has led to concerns about overheating in the economy.
The large current account deficit, alongside the extensive FX-denominated corporate debt and investor uncertainty due to domestic and geopolitical risks, has resulted in volatility of the lira, which depreciated on average by 20 per cent against the US dollar in 2017. The depreciation has continued in 2018.
With elections brought forward from November 2019 to June 2018, the government will have scope to rebalance policy sooner, adjusting fiscal and macroprudential policy to address overheating concerns and reducing domestic and external imbalances. It will also be important to address inflation and anchor inflation expectations by tightening monetary policy. This is key to reassuring investors at a time when the global cycle is turning. With gross external financing needs likely to exceed 25 per cent of GDP in 2018, the country will remain highly exposed to changing global liquidity conditions, particularly given weak FDI inflows and limited FX reserves.
Strong public finances and a stable banking system remain the key anchors of the economy, despite the recent loosening of fiscal policies and growing contingent liabilities. A significant strength of Turkey is its low public debt (of around 29 per cent of GDP) and its low budget deficit (which stood at 1.5 per cent of GDP at end 2017 notwithstanding a slight increase as a result of the expansionary fiscal policies). The banking system remains well capitalised, with an NPL ratio below 3 per cent, although the effects of the rapid credit growth associated with the CGF remain to be seen.
Growth of around 4.4 per cent is expected in 2018, moderating to around 4.2 per cent in 2019, in line with potential growth, as limits to credit growth lead to a cooling down of domestic demand. Net exports are likely to partly offset this, as a result of the ongoing weakness of the lira and increasing demand in key export markets. Key risks to the outlook are potential moderation in global liquidity, investor uncertainty in the context of the domestic and geopolitical environment, and further depreciation of the lira. In the medium term the government needs to undertake structural reforms to improve competitiveness and achieve external rebalancing to generate sustainable growth. The early elections should provide a window for the government to do this.