THE TURKISH ECONOMY
Fatih ÖZATAY
December 2, 2014
Ankara
GDP and population
2013
GDP (bil. $)
822.1
Rank in the world
17th
Population (million)
76.1
GDP per capita ($)
10808
GDP per capita (PPP, $)
15353
World Bank classification High middle income
POST 2001 CRISIS: TOWARDS
MACROECONOMIC STABILITY
Since 2001:
towards macroeconomic stability
• Important steps towards macroeconomic stability
• Fiscal discipline:
– Low public debt and budget deficit
– Low real borrowing rates
• Stronger banking sector:
– Low non-performing loans
– Upward trend in credit-to-GDP ratio
– Satisfactory capital-to-asset ratio
• Independent central bank and banking regulation
and supervision agency
Fiscal discipline
Budget deficit: 2000-2013 (%GDP)
Fiscal discipline
Public debt: 2001Q1-2014Q2 (%GDP)
Fiscal discipline
Real treasury rate: January 2001 – October 2014 (%)
Strong banking sector
Non-performing loans: 2001Q1-2014Q3 (% of loans)
Strong banking sector
Total credit: 2001Q1-2014Q2 (%GDP)
Lower inflation:
January 2001 – October 2014 (%)
High growth in the 2002-2007 period
1960-2013 2002-2007
Average growth rate (%)
4.4
6.8
Average per capita growth rate (%)
2.4
5.5
SHARP DIFFERENCE BETWEEN THE
2002-2007 PERIOD AND AFTERWARDS
GDP growth performance
1960-2013
2002-2007
2008-2013
2012-2013
Average growth rate (%)
GDP GDP per capita
4.4
2.4
6.8
5.5
3.2
1.8
3.1
1.9
GDP Growth:
2011Q1-2014Q2 (%)
Private investment growth:
2011Q1-2014Q2 (%)
Private consumption growth:
2011Q1-2014Q2 (%)
Unemployment:
January 2011 – August 2014 (%)
Inflation:
January 2011 - October 2014 (%)
Current account deficit:
2011Q1 – 2014Q2 (% GDP)
Current situation
(% of GDP)
Current account balance
Net financing
Public debt stock
Budget deficit
External debt stock
Domestic credit
2013
-7.9
8.7
36.2
-1.2
53
66.9
Current situation
(%, average of last 12 months)
Inflation rate
Unemployment rate
Labor force participation rate
(Billion $, sum of last 12 months)
Exports
Tourism revenues
Imports
Current account balance
Net financing
Official reserves
8.6
9.5
49.6
158.8
29.8
243.6
-46.7
42.4
112.5
2008-2014 is radically different than 2002-2007
• Growth in 2002-2007 was rather high.
• However, despite strong fiscal and financial
position, high growth performance did not
continue afterwards.
• Turkey is one of the economies that contracted
most in 2009.
• Growth in the 2012-2014 period is low…
• There is inertia in inflation and unemployment
• WHY?
OUTLOOK FOR 2015
2015
• What will be the main drivers of the Turkish
economy in 2015?
–
–
–
–
External financing (net capital inflows)
June general elections
Energy prices
Economic outlook for Europe, Middle East and North
Africa
• Main determinant will be amount of external
financing
• WHY?
Importance of external financing:
mediocre level of investment (% GDP)
2002-2006 2007-2011
Argentina
16.8
19.7
Brazil
16.4
19.4
China
41.0
45.8
India
30.9
36.2
Indonesia
24.3
29.8
Korea
32.0
31.8
Mexico
22.1
23.0
Russia
20.2
22.5
Saudi Arabia
20.9
28.6
South Africa
17.6
20.3
Turkey
19.3
20.2
Developing countries
26.2
30.3
2012
17.3
17.5
47.7
34.7
34.7
31.0
23.1
23.6
26.3
19.4
20.1
31.5
2013
18.3
18.1
47.8
31.4
33.6
29.0
21.5
22.6
28.2
19.4
20.6
31.6
Importance of external financing:
strikingly low level of savings (% GDP)
2002-2006 2007-2011
Argentina
20.7
20.6
Brazil
17.2
17.9
China
45.5
51.8
India
31.1
33.5
Indonesia
26.8
30.7
Korea
33.6
33.7
Mexico
21.4
21.9
Russia
29.6
27.6
Saudi Arabia
39.5
46.4
South Africa
15.3
15.8
Turkey
16.0
14.3
Developing countries
29.4
32.7
2012
17.1
15.1
50.3
30.0
32.0
35.2
21.9
27.1
48.8
14.2
14.0
32.9
2013
17.5
14.5
49.7
29.7
30.3
35.1
19.5
24.2
45.9
13.5
12.6
32.4
Importance of external financing:
high savings-investment gap (current account deficit)
2002-2006 2007-2011 2012 2013
Investment (% GDP)
19.3
20.2
20.1
20.6
Savings (% GDP)
16.0
14.3
14.0
12.6
Importance of external financing:
• Episodes of surge in capital inflows:
– Increase in asset prices, appreciation of the lira,
decrease in interest rates, rise in confidence
– Rapid domestic credit growth
• Episodes of capital outflows or ‘sudden stops’:
– Decrease in asset prices, depreciation of the lira,
and increase in interest rates, reduction in
confidence
– Low domestic credit growth or credit crunch
Net external financing and
real domestic credit cycle
Net external financing and
real value of the lira
Determinants of net external financing
• Push factors:
– International risk appetite: would mainly be
shaped by decisions of large central banks: FED,
ECB, BOJ, BOE
• Pull factors:
– Domestic risks: June (?) general election
– Domestic risks: War against Isis (Iraq, Syria, and
U.S.)
– Economic policy –particularly monetary policy
International risk appetite
• FED will start increasing interest rates in 2015
(when?)
• In the past (in the 1990s for example) such a
policy always created severe problems in
emerging economies with significant current
account deficits.
• However, large emerging market economies have
much more stronger economic fundamentals
• Nevertheless, savings-deficit emerging economies
like Turkey will be affected negatively.
International risk appetite
• The extent of negative development would
depend on the cumulative amount of increase
in policy rate of FED and its timing.
• BOE is also going to start tightening.
• The ECB and BOJ are in the easing cycle.
• Could ECB and BOJ easing offset FED and BOE
tightening?
• NO! FED is the dominant player.
Domestic risks: general election in Turkey
• According to commentators AKP will win June
general election
• The main question is whether AKP could gain
enough number of seats in the parliament to
change the constitution.
• Would this uncertainty lead the incumbent to
ease fiscal policy and unwind January 2014
prudential restrictions on consumer credits?
Domestic risks: general election in Turkey
• The government could increase government
consumption and investment. This increase
might have already started.
• Note that such easing would not undermine
fiscal discipline (7 months to elections)
• However it could temporarily increase GDP
growth.
• These developments would not increase risk
perception for Turkey.
Domestic risks: general election in Turkey
• At the beginning of 2014 Banking Regulation and
Supervision Authority (BRSA) took various
decisions to contain rapid consumer credit
growth.
• Those decisions proved to be rather effective:
rate of growth of consumer credits declined to 15
percent from a level of more than 30%.
• One of the main determinants of private
consumption (70% of GDP) is consumer credit
growth.
Domestic risks: general election in Turkey
• Would BRSA unwind these decisions?
• If it unwinds this will cause an increase in
consumer credit and private consumption.
• However, such a move could increase risk
perception for Turkey.
Domestic risks: war against Isis
• The war against Isis substantially affects domestic
politics and international relations of Turkey.
• Domestic: it has the potential to lead to an
uprising in the South East if the “Turkey is not
doing anything to help Kobani” perception
among the Kurds would mushroom. This could
jeopardize peace negotiations between Turkey
and Abdullah Öcalan –the jailed leader of PKK.
• This possibility decreased for the time being by
the government’s move to let
Domestic risks: war against Isis
• This possibility decreased for the time being by
the government’s move
– in late October to let 150+ peshmerga –soldiers of the
Northern Iraq Kurdish army- to pass to Kobani with
ammunition and weapons.
– simultaneously it took some steps to accelerate peace
negotiations with Abdullah Öcalan (of course also
with PKK).
• Note that the government has recently sent a bill
on security to be passed through the parliament
the main aim of which is to punish more those
who engage in acts of violence.
Domestic risks: war against Isis
• The U.S. and Turkey: U.S. vice president Biden visited
Turkey on the second half of November
• Washington Post (after the visit): “The visit did not
result in any firm new agreements over such sensitive
issues as Turkey’s long-standing call that protected
buffer zones be created inside Syria along the Turkish
border, or U.S. requests to use Turkey’s Incirlik Air Base
to fly bombing missions against the Islamic State in
Syria and Iraq.”
• According to Turkish commentators, the U.S. and
Turkey agreed on issues related to Iraq whereas they
kept their disagreement on Syria issues intact.
Domestic risks: economic policy
• Fiscal stance is strong. A temporary easing
before the elections would not undermine this
position.
• Banking sector is also strong.
• Two minor (?) risks:
– Occasionally the pressure on the Central Bank
rises.
– As noted before: could restriction on credit
growth be eased?
A reminder (confession):
Forecasts for 2014 in the 27th November 2013
meeting of the Turkish Foundry Association
•
•
•
•
•
(Likely realizations in parenthesis)
Growth: 3-3.5% (around 3%, first half: 3.3%)
Unemployment: 10.5% (10.4%)
Average inflation: 7.5-8.5% (first 10 months: 8.9)
Exports: Mildly above 2013 performance (first 10
months: 6.2% in 2013, 5.8% in 2014 (non-gold))
• Current account deficit: Slightly below 7% of GDP
(around %5.5 of GDP)
Base scenario…
• FED will start to increase its policy rate around
mid 2015. This will cause a rise in 10-year US
Treasury rate to at least 3%.
• A mild increase in growth in Europe (IMF).
• A mild increase in growth in Middle East and
North Africa (IMF).
• ECB continues to easing to the extent that
Germany allows.
• Petroleum prices will stay at around 80$ per
barrel (Brent).
Base scenario…
• No further deterioration in the U.S.-Turkey
relations.
• Uncertainty due to war against Isis continues.
• The so called ‘solution process’ (peace
negotiations between Turkey and PKK)
continues.
• A market friendly minister responsible from
economy would be appointed after June
elections.
2015 forecasts
• Close to 3% GDP growth in 2015 would be a
success.
• Inflation could hover around 8% as in the last
three years or so.
• Unemployment rate can be in the 10-11%
band.
• Current account deficit could decrease to 5%
of GDP.
THE TURKISH ECONOMY
Fatih ÖZATAY
December 2, 2014
Ankara