Turkey: reality is better than perception
In spite of what appears to be a turbulent few years for republic, the nation’s fundamentals are relatively strong when viewed objectively.
Beleaguered by continuous geopolitical tensions, Turkey had to endure domestic and external shocks for numerous years. Nevertheless in spite of these blows, the country has done relatively well since 2000.
Following a strong performance in 2015, growth has unfortunately waned. The Turkey Regular Economic Note (TREN) recently issued by the World Bank revised its growth forecast for 2016 to 2.1 per cent, as recovery in Q4 was weaker than envisaged earlier. In 2017, growth in Turkey is expected to recover to 2.7 per cent in 2017 thanks to improving net exports. The country’s economy shrank in Q3 amid temporary political turmoil and falling tourism revenues. Seasonally adjusted GDP plunged by 2.7 per cent q-o-q in Q3, recording the largest drop since March 2009, because the failed coup attempt and its aftermath depressed business and consumer confidence and tourism revenues declined.
“We expect growth in 2017 to be driven more by public spending and net exports and less by private consumption and investment. Strengthening growth in the EU will help increase exports, while subdued private demand will constrain import growth,” said Johannes Zutt, World Bank Country Director for Turkey.
Deficit and inflation
The IMF, in its Article IV Consultation with Turkey found that growth in the country remains consumption-driven. Investment is weak amid heightened uncertainty and a sharp deceleration of credit growth. Inflation has moderated but is still well above target. The current account deficit remains sizeable, as the decline in tourism offsets savings from low energy prices.
Speaking at the International Media Forum in Antalya, Turkey, in May, Mehmet ┼×im┼ček, Deputy Prime Minister of Turkey stated that the most pressing problems facing the Turkish economy is the current deficit and inflation. “We would have been able to keep the deficit under control if it weren’t for the problems we faced in tourism last year. But I can say that the deficit will be on the decline. And in the past two years Turkey has gone through a real shock. This translated into inflation. We are working towards bringing inflation down to single digit level,” he said. Thus far 7.3 million new jobs were created after the global financial crisis and he explained that the government is finding it difficult to keep the unemployment level below 10 per cent.
┼×im┼ček pointed out that the country’s fiscal deficit is 1.6 per cent of its GDP with an expectation that this year’s deficit would be higher.
Turkey’s national income had nearly doubled in the last 14 years, according to ┼×im┼ček. He affirmed that the Turkish economy was developing. ┼×im┼ček, stating that the financial markets had returned to normal after the referendum, said that this was normal as the markets were expecting the referendum result to be ‘Yes’. “Net exports, is a field which we should be focusing on. We have increased the support given to export so as to achieve economic growth based on export. We even issued special passports for exporters,” he explained.
Banking and finance
┼×im┼ček in his speech at the forum stressed that the banking sector in Turkey is in well-capitalised, with solid asset quality. This is in line with IMF’s finding that bank capital levels remain high, although some buffers are decreasing. Higher profits boosted capital adequacy, reflecting in part lower overnight borrowing costs and relaxation of prudential norms.
Non-performing loans are increasing from a low level that partly reflects accommodating rules for loan restructuring. Credit growth slowed markedly in 2016, due to both demand and supply factors. According to the minister, non-performing loans make up two per cent of overall loans in the country.
In its Article IV Consultation, the IMF welcomed that the banking sector remains well capitalised, and encouraged continued vigilance in light of a deterioration in asset quality. It cautioned that banks face substantially higher credit risks, and called for further strengthening of supervision and bank governance. The IMF recommended that macro-prudential policy should be strengthened, focusing on foreign exchange and other systemic risks, and not be used for demand management.
Normalcy is believed to have returned to financial markets post-referendum. This is reflected in the stabilisation of the Turkish lira. Renaissance Capital in a recent commentary highlighted that Turkey does better when the Euro strengthens, as they tend to import more in dollars, but they often export in Euros. As a currency that trades 50/50 with the euro and the US dollar, a stronger euro means imported inflationary pressures are falling when the euro is getting stronger, while Turkish exports to Europe are getting cheaper.
Providing a progressive strategy for the advancement of the Turkish economy, ┼×im┼ček said the government’s aim is to introduce more reforms in moving towards a high income threshold. In addition, the administration also aims to make preschool mandatory in the country by 2019.
“Reforms were put into place during the Özal administration, and Turkey became a middle-income country. We had become an upper middle-income country thanks to the reforms initiated since 2003. We were just about to become a high-level income country when the terror attempts started to happen,” he explained.
Stating that Turkey had to go through structural reforms, ┼×im┼ček added, “We prioritise the education reform. We will make reforms in order to organise competitiveness and establish a better investment environment. Structural reforms regarding research-development will be put into place, as well as reforms concerning the labour market and administrative regulations.”
In global competition, Turkey ranks 55th among 138 countries, ┼×im┼ček said, “Turkey drew in $15 billion in investment until 2002. In the last 14 years this has risen to $180 billion. So this means we have improved the investment environment. We will continue to do so.” With an aim to put more investment into tradables, a key challenge in increasing the country’s investment competitiveness is moving up the value chain. Additionally, increasing the efficiency of the country’s judicial system as the current process is relatively slow in comparison to international standards.
The IMF encourages Turkish authorities to intensify the pace of structural reforms to promote economic rebalancing and boost productivity. They welcomed progress made to reform the voluntary pension system, and urged continued efforts to increase domestic saving. IMF also underscored the importance of improving the investment climate and labour market competitiveness. They commended the authorities for hosting a large number of refugees and for their efforts to integrate them into the labour market, while stressing the importance of continued international assistance.
Commenting on Turkey’s potential, Dimitris Tsitsiragos, Vice President, Global Client Services at the International Finance Corporation, said, “Turkey in some ways shares the same characteristics with the Middle East but it is very well integrated into Europe. Turkey also has the same opportunities as ME (healthcare, infrastructure, services sector education) these are all opportunities. Turkey is very outward looking—it is looking at ME and Europe as a market. There are many Turkish companies that operate globally. Many have a strong regional presence and they are now looking at the Middle East and also Africa.”
Relationship with the EU
The government’s aim is to keep Turkey anchored to the EU. Evidently, a recovering Euro zone is good news for Turkey.
“We have to look at the facts. We have to continue the EU accession process. For this we need more structural reforms. Secondly we must connect Turkey to the EU. Thirdly we need to get our message across. Then we can explain why there is a state of emergency in Turkey. We are trying to do this. In today’s world even a single tweet can lead to misperceptions. And it takes time to correct those perceptions. That is why we need more structural reforms,” said ┼×im┼ček.
Growth is projected to be below potential in 2016–17. The political focus on transitioning to a presidential system; renewed questions over the future of the EU-Turkey relations; and tense security situation in the South-East and conflicts in neighbouring countries are expected to prolong the uncertainty, keeping domestic demand subdued. Fiscal stimulus and the expected completion of the gradual lifting of Russian sanctions are expected to support growth. Over the medium-term, growth is projected to firm around 3.5 per cent. Inflation is expected to stay above target and the current account deficit to remain sizeable.
In spite of the critical perception of a troubled the Turkish economy, the country’s fundamentals are in essence stable. And only needs some fine tuning to align itself to global standards.