The Ankara government has played down forecasts by the Organisation for Economic Cooperation and Development (OECD) and decisions of some ratings agencies to lower their expectations for the Turkish economy this year, saying recent reports did not take into account a number of favourable factors that will fuel growth.
On May 6, the OECD issued the preliminary version of the “OECD Economic Outlook” for 2014, its twice-yearly report on major economic trends. The report reduced Turkey’s forecast for growth, predicting GDP would expand by 2.8% this year, down from the 3.8% it had projected at the beginning of 2014 and below the global average of 3.6%. The report said the Turkish economy would remain subdued through to the middle of 2015, and faced a number of threats to growth in that period, including falls in market confidence domestically and internationally.
“Further financial market turmoil during the prospective normalisation of US monetary policy and intensifying internal political tensions are two major risks,” the report said.
The report also warned that persistently high inflation and a wide current account deficit (CAD) would also cause Turkey problems during the year, though it said government efforts to bridge the gap were having some impact.
“Growth is weak but headline inflation, at about 8.5%, far exceeds the 5% official target,” the OECD said. “The current account deficit approached 8% by late 2013, and despite progress in rebalancing demand in early 2014, the terms of trade losses will likely keep it above 6% for some time.” The organisation is due to publish its full economic survey of Turkey in July.
However, government officials have said analysts have ignored certain recent developments, including the strong showing of the ruling Justice and Development Party (AKP) in the March 30 municipal elections, a sign of political stability and continuity.
In reply to the OECD report, the deputy prime minister, Ali Babacan, said on May 7 that some of the forecasts were premature, and that the government’s growth targets for the year could still be reached.
“We believe it is still early for a revision,” he said. “Turkey ended 2013 with 4% growth, which no-one expected, therefore we believe that still it is realistic to achieve 4% growth (in 2014).”
Mehmet Şimşek, the finance minister, has also been talking up the economy recently, saying in late April that while the 4% growth target may seem optimistic, improved tax collection data, greater business activity and higher industrial production suggested the economy was at least maintaining its present rate of movement.
Though Şimşek noted that industrial output, a key indicator of production for the export markets, was improving, it may be later in the year before a definite trend can be established. According to data issued by the state statistics agency TurkStat on May 8, industrial output was up 4.2% year-on-year in March, though this was offset to a degree by the fact that month-on-month production was down marginally, falling 0.4% against February. More positive was the quarterly result, with output in the first quarter of 2014 being up 1.4% on the last three months of 2013.
Ratings agencies have also been taking note of the Turkish economy, its current account position and growth rates. In a note to investors issued on May 2, ratings agency Fitch said it expected the CAD to contract this year from 8% of GDP to 6.2%, though this was dependent on the government being flexible in its approach to managing the economy and making difficult policy decisions, such as pushing up interest rates earlier this year.
“If the government were successful in increasing exports and savings, and achieving a better mix of current account financing, in particular via higher foreign direct investment, it would help address these imbalances,” the Fitch statement said.
The agency also maintained its stable outlook for Turkey’s sovereign debt, though it did warn political risks and uncertainty could have an impact on this in the future. In April, Fitch had lowered its 2014 growth forecasts for Turkey from 3.2% to 2.5%, while warning that inflation was a growing concern.
While inflation is climbing, fuelled by high import and food costs and by solid domestic demand, Turkey’s central bank has indicated it may heed calls from Prime Minister Recep Tayyip Erdoğan to ease its key lending rates. On May 8, the central bank’s deputy governor Turalay Kenç said that despite inflation being well beyond the bank’s projected target of 7.6%, having hit 9.38% in April, there was still some room for manoeuvre on rates.
“The good thing about the inflation outlook is inflation expectations have deteriorated but the deterioration is really quite moderate,” he told a conference in London. “A slightly lower policy rate would still give you a tight monetary policy stance.”
Any rate cut – and the consequent boost to domestic spending – would have to be balanced against the potential to further fuel inflation and to increase personal debt levels, while a rise in consumer demand could also feed into a stronger call for imported goods, in turn widening the CAD.
The government’s cause is being both aided and hindered by recent movements of the lira. The local currency had been slowly regaining strength in April and May, recovering from record lows early in the year when it fell to around TL2.3 to the dollar to TL2.08 as of May 8, its highest level since late December. While a stronger currency will help reduce the cost of imports, and ease concerns of those paying off foreign debts, a more robust lira will also make Turkey’s exports less appealing, balancing out some of the other gains.
With even some of Turkey’s senior ministers acknowledging that the targeted 4% growth rate may be difficult to hit this year, it is likely that the economy will expand at a slower rate than formerly forecast. However, if the economies of many of Turkey’s main trading partners, notably in Europe, do move further away from recession as the OECD predicts, this could provide a boost to Turkish exporters and industrialists. Since it is unlikely that Turkey will achieve the government’s hoped-for rate of growth, GDP expansion may fall somewhere between the optimistic 4% of the AKP and the cooler appreciation of the OECD and ratings agencies.
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