Turkey: Main Economic Outlook (November 2017)


 

Uncertainties remain !

Economic growth is estimated to have exceeded 6% in 2017, driven by strong fiscal stimulus and an export market recovery, and is projected to edge down but to stay between 4½ and 5% in 2018 and 2019. Consumer price inflation remains far above the target and disinflation is projected to be slow.

As fiscal stimulus is scheduled to be withdrawn in 2018, against the backdrop of continuing regional and domestic uncertainties, strengthening business and household sentiment will be essential for maintaining growth momentum. Effective progress with the announced structural reforms, fiscal transparency and disinflation goals of the Medium-Term Economic Programme 2018-20 would bolster confidence and boost domestic and foreign private business investment.

Financial vulnerabilities stay high owing to the magnitude of foreign financing needs stemming from a persistently high current account deficit. Debt leverage in many non-financial firms has also increased considerably, limiting their capacity for additional borrowing and investment.

The large government credit guarantee scheme introduced in 2017 alleviated short-term financial strains and is assumed to remain in force in the coming two years. However, to increase resilience, the ecosystem for equity participation by domestic and international investors in firms of all sizes should be upgraded.

***

Economic growth is estimated to have exceeded 6% in 2017, driven by strong fiscal stimulus and an export market recovery, and is projected to edge down but to stay between 4½ and 5% in 2018 and 2019. Consumer price inflation remains far above the target and disinflation is projected to be slow.

As fiscal stimulus is scheduled to be withdrawn in 2018, against the backdrop of continuing regional and domestic uncertainties, strengthening business and household sentiment will be essential for maintaining growth momentum. Effective progress with the announced structural reforms, fiscal transparency and disinflation goals of the Medium-Term Economic Programme 2018-20 would bolster confidence and boost domestic and foreign private business investment.

Financial vulnerabilities stay high owing to the magnitude of foreign financing needs stemming from a persistently high current account deficit. Debt leverage in many non-financial firms has also increased considerably, limiting their capacity for additional borrowing and investment. The large government credit guarantee scheme introduced in 2017 alleviated short-term financial strains and is assumed to remain in force in the coming two years. However, to increase resilience, the ecosystem for equity participation by domestic and international investors in firms of all sizes should be upgraded.

The recovery is driven by public investment and exports

Growth has gathered momentum in 2017 on the back of temporary tax measures stimulating consumption and employment, massive government credit guarantees and a strong recovery in export demand. Employment has increased rapidly, but the labour force is expanding faster still, by 3% annually even without including the informal jobs held by refugees. As a result, the unemployment rate is around 11%.

The vigour of infrastructure investment, including via public-private partnerships, contrasts with entrepreneurs’ “wait-and-see” attitudes, which are holding back private business investment, notwithstanding a large government credit guarantee scheme introduced in 2017. Many firms start to be constrained by a high level of debt. Exports are fuelled by robust demand from Europe, notably from global value chain partners.

The number of tourists has recovered to its pre-2016 levels, but the composition of visitors has changed and average revenues per visitor have declined.

Strengthening the confidence of investors is crucial

The Medium-Term Economic Programme (MTEP) 2018-20 announced in September 2017 sets relatively conservative macroeconomic and public finance objectives. If wholly implemented, it may reduce policy uncertainties in the run-up to the 2019 presidential, parliamentary and municipal elections. This would help reduce the recently heightened volatility of the exchange rate. The envisaged fiscal consolidation may have a slight negative impact on growth in the short term, but insofar as it helps improve confidence, it would reduce risk premia, lessen firms’ and households’ financing costs, and support consumption and investment. The MTEP’s new incentives for high value-added manufacturing activities and foreign direct investment may also help to boost capital spending.

The orientation of economic policy remains subject to uncertainties. On the monetary policy side, headline inflation has been running at double-digit rates, far above the 5% target, and inflation expectations are not anchored. Policy credibility and predictability would improve if the central bank used its benchmark one-week repo rate, rather than liquidity adjustments through exceptional windows at special rates, as its standard instrument of monetary policy. On the fiscal side, some of the planned tax increases have already been challenged and are being revised. The future of government loan guarantees, most of which were granted in 2017 within a short period and which will expire in 2018, has yet to be settled. Any extension should be reserved to investment loans, to support the revival of business investment. In the medium term, a downsizing schedule of this exceptionally large guarantee programme would contribute to fiscal transparency and policy predictability.

Turkey’s yearly foreign funding needs approach 25% of GDP, making the economy vulnerable to tensions in international financing conditions. The foreign debt stock is being rolled over smoothly, but at comparatively high cost. Banks and non-financial firms have accumulated high debt levels, notably in foreign currency. More rigorous monitoring of private sector foreign liabilities is in the offing, as are specific prudential rules to contain them. More generally, domestic saving should be increased and greater recourse to equity as opposed to debt financing is warranted. Such balance sheet strengthening requires a better ecosystem for equity participations by domestic and international institutional investors as well as private equity providers.

Uncertainties remain

Provided that expectations stay stable amid uncertain regional geopolitical events, that export performance remains strong, and that economic policy stays the course in the pre-electoral period, GDP growth is projected to edge down but to remain between 4½ and 5% in 2018 and 2019. If regional and domestic uncertainties were to be reduced, including through progress in the updating of the Customs Union agreement with the European Union, a stronger acceleration in domestic and international business investment could lift growth onto a stronger path. If, in contrast, uncertainties grow in these areas, confidence would weaken, international financing conditions may tighten and growth would be slower.

[READ full Turkey Chapter (PDF)]

OECD Economic Outlook and Interim Economic Outlook [Full Report]

Leave a Reply

Please log in using one of these methods to post your comment:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.

%d bloggers like this: