To grow or not

In 2017, growth was better than expected, but worse than portrayed. We look at the finer details of Turkey's growth, and the vulnerabilities it has produced.

Is growth an end in itself? We look at Turkey’s high growth rate, and its dark side...

1

How was the growth performance of the economy in 2017?

Growth in 2017 was 7.42 percent, exceeding the previous year’s growth rate by 4.23 points and also reaching the highest level in the last 4 years. However, as a result of the upswing in the dollar exchange rate, the dollar value of gross domestic product (GDP) turned out to be reversed. GDP, which maintained its previous year’s level in 2016, fell to $851 billion in 2017, an $11.7 billion loss. As a result, the per capita GDP dropped by $286 to $10,597.

2

What are the growth rates of key sectors?

In 2017, the rate of growth in industry rose to 9.20 percent from 4.25 percent. Manufacturing industry growth also accelerated by five percentage points from 3.84 percent to 8.84 percent. The contribution of industry to total growth was 1.81 points, an increase of 0.97 points. The growth rate in the construction sector climbed to 8.90 percent from 5.37 percent. In services, information and communications was the fastest growing sector at 12.90 percent growth. Trade, transportation, storage, accommodation and food services had the highest increase in growth rate, 10.44 percentage points to 10.65 percent from 0.21 percent. Finance and insurance had the slowest growth rate at 2.64 percent.

3

What was the effect of consumption expenditures?

Growth depended on domestic consumption in 2017. The growth rate in private consumption rose from 3.66 percent to 6.11 percent. The contribution of private consumption to growth also rose from 2.21 points to 3.66 points. But the growth rate in the consumption expenditure of the state decreased to 5.01 percent from 9.52 percent. The contribution of the government to the growth of consumption expenditures also came down to 0.74 points from 1.32 points.

4

How much did investments increase?

The growth rate in investments increased to 7.31 percent from 2.25 percent. The contribution of investments to total growth also increased from 0.67 points to 2.14 points. However, almost all of the investment growth took place in construction. The growth rate of construction investments rose from 2.76 percent to 11.98 percent. 1.95 points of the 2.14 percentage points contribution of investmens to total growth came from construction invest- ments. On the other hand, the growth in machine equipment investments dropped from 1.16 percent to 0.69 percent. The contribution of machine equipment investments to growth was only 0.08 points.

5

What was the impact of exports and imports?

Growing by 12.04 percent, exports had a significant effect on total growth, with 2.64 points. However, import growth also rose to 10.65 percent, and it brought down the total growth by 2.56 points. Thus, the contribution of net exports growth was only 0.08 points.

6

What was the effect on compensation of employees, capital gains and income?

In 2017, compensation of employees increased by 12.86 percent in current prices, while the increase in capital gains and income increased by (gross) 23.60 percent and by (net) 26.25 percent. The revenue of profits and income increased at a rate twice as fast as the compensation of employees. As a result, the share of labor in national income decreased by 1.67 points to 30.54 percent.

7

What were the developments in the CAD-to-GDP ratio?

Growth based on internal demand brought up the CAD-to-GDP ratio to 5.54 percent, a dangerous level compared to similar countries. In 2016, the CAD-to-GDP ratio had declined to 3.84 percent. In 2017, this rate rose by 1.70 points and passed the 5 percent threshold. .

8

What factors contributed to the 2017 growth rate?

The most important factor in achieving high growth in 2017 was loans backed by the Credit Guarantee Fund (KGF). Institutions were not selective while issuing KGF-backed loans. Parallel to this practice, there occured a loosening in nonperforming loans. All this increased the indebtedness rates in the real sector and created a credit portfolio quality problem on the banking side. The fact that most of the KGFbacked loans have not gone to investments in efficiency and production also increases the risk.

9

How did foreign resources affect growth?

The second factor supporting high growth was foreign resources coming via hot money and credit. However, the overwhelming portion of the external sources that entered in 2017 were short-term portfolio investments or short-term credits. The fact that the financing of the current account was funded mainly by hot money and short term credits created external fragility in the economy. This will keep the economy dependent on constant borrowing and finding fresh resources.

10

Is it possible to protect the growth rate in 2018?

No. The possibility of a serious decline in growth is very real, because the factors that drove growth in 2017 are not sustainable. It is not possible to repeat the performance of hot money in 2017 at a time when the FED is raising interest rates and shrinking the balance sheet. External borrowing through loans will be both difficult and costly. In addition, international geopolitical tensions will keep markets under pressure. Thus, political risks will continue to adversely affect the markets and investment appetite.