Turkey’s weakening growth dynamics
Upon reading the headline some might ask: “What are you talking about? Turkey’s economy grew by 5% in the first quarter and a similar growth rate is expected for the second quarter. And it will grow with the base effect of the previous year even if the economy drags in the third quarter. So, how can the growth dynamics weaken under such circumstances?” Indeed, Turkey will finish 2017 with a growth rate of 4% no matter what happens next. However, when we look ahead to the medium- and long-term, unfortunately we can’t be that optimistic. As a matter of fact, we should look at growth dynamics closely item-by-item:
Everybody agrees on one thing: The government was right about turning on public expenditure taps at the right time in places where the economy prominently started to show distress, taking some measures and putting a tax deferral play in place. However, the most recent budget figures indicate that “the seas drained away.” The budget deficit surpassed 25 billion TL in the first six months of 2017 and 55 billion TL in the previous 12 months. To better evaluate these figures, we should know that the budget deficit in the 12 months from July 2015 to June 2016 was 24 billion TL. Shortly, we will come to an end of the measures taken via fiscal policy tools.
As national income statistics prominently confirm, construction sector and housing sales have played an important role in Turkey’s growth for the last 10 years. The most recent statistics may not refer to significant stagnation but we’ve been hearing more and more complaints from sector representatives regarding a slowdown in sales. Likewise, significant stagnation in commercial property sales is also undeniable.
Another strong accelerator of growth in the last decade was the contribution of consumer loans on domestic consumption. But maintaining such pace in this portfolio without exceeding certain risk limits seems highly difficult. Only workers with a salary and purchasing power can use those loans and when considering the employment and income distribution in the Turkish economy, most of this portfolio has already been exploited.
Even though the banking sector has broken profit records, stretching some rules regarding the exploitation of credit portfolios had a great impact on this performance. Personally, I believe this amount of stretch has reached its limit and that Turkish lira-denominated credits exceeding Turkish lira-de- posits will be an important constraint after today.
The tourism sector in Turkey, which used to create the biggest added value and provide the biggest foreign exchange inflow, took a major blow in 2016. We were expecting a recovery to a large extent this year. However, figures indicate a modest recovery with volume still below 2014-15 levels. The fact that relations with the EU and especially Germany are still not normalizing should definitely have an impact on this. Besides, other competing countries operating in the summer tourism market create their own effect.
Weakening foreign exchange rates had created an expectation of a significant acceleration in exports and a decline in our chronicled current account deficit (CAD). Turkey hasn’t yet seen any such acceleration in exports. I haven’t calculated it thoroughly but when excluding the automotive sector we can even say that our export performance has actually stagnated. On the other hand, as recent figures confirmed, the CAD continues to rise. We could even see that hit 5% by the end of the year.
Despite having a modest share within the national income, agriculture and livestock is an important sector. As we all know, costs are rising here and they have an impact on inflation. Some imports are allowed to manage the domestic market. However, this might affect agricultural production positively in the medium term.
Business people making investment decisions depend on being in a foreseeable economical environment rather than one of credit interest and incentives. That also counts for foreign investors.
Soon, Turkey’s economy will require a new story, a new foreign and domestic understanding, new merit-based management, a breath of fresh air and a new vision.