Growth to ‘edge up to 3.5%’ in 2018, report says
With consumer price inflation back in double digits and disinflation projected to be slow, economic growth in Turkey is projected to “edge up to around 3.5%” in 2017 and 2018, according to the first volume of the OECD’s Economic Outlook report.
According to the chapter focused on Turkey, Developments in Individual OECD and Selected Non-Member Economies, fiscal and other measures, supported by a pick-up in export demand, have stimulated private consumption and investment in the country.
The report warns that the impact of these “fiscal measures on public finances and the quality of credit allocation should be monitored.” It adds: “Faced with sharp exchange rate depreciation and rising inflation expectations, the monetary stance has been tightened, but explicit increases in the main policy rate are warranted.”
The OECD outlook suggests that “increasing net exports through further integration in global and European value chains is crucial for job creation in the face of a high unemployment rate, without further increasing the current account deficit.”
Economy recovered from 2016
The OECD report highlights that “numerous government measures, both private consumption and investment have started to recover.” Against the background of steady rises in the labor force, the report adds that the youth unemployment rate – historically high – reached 24% in early 2017.
It adds that growth is being aided by “an acceleration of goods exports, on the back of improving demand from Europe and competitiveness gains delivered by exchange rate depreciation.” However, the report notes that ser- vice exports remain weak and are dominated by tourism (representing 16% of total exports). Although tourist inflows from Russia resumed, the report notes that the inflow of visitors from Europe (which represent two thirds of all tourist arrivals) “remains subdued” and that Turkey’s current account deficit is widening again.
New f scal st mulus measures
The OECD report continues: “Policymakers have made use of the fiscal space created by past budget restraint to launch measures to support private consumption, investment and job creation. Substantial restructuring of tax and social security contribution obligations has been offered. Purchases of new housing, furniture and white goods benefit from VAT cuts. Prudential rules for consumer loans and credit cards have been relaxed. In the business sector, government credit guarantees covering from 85% to 100% of bank loans to large firms, SMEs and exporters, and zero-interest loans to large numbers of SMEs are fuelling business loans.” However, it warns: “Increased risks of excessive balance sheet leverage must be kept in check with effective prudential rules.”
The report goes on to mention Turkey’s “national employment campaign” launched in early 2017. Interestingly, under this banner, the employment costs of newly hired workers are being subsidised by 30% for one year and for four years for young and female workers. The campaign also offers other exemptions for companies hiring various categories of workers in different regions.
The OECD report takes on a darker hue while noting that the ensuing fiscal implications, including for off-budget liabilities, have yet to be reported. “The publication of general government accounts, as part of the comprehensive national accounts revisions in December 2016 (which entailed a 20% increase in the level of GDP) was a long-awaited step in fiscal transparency,” the report added. “The cost of the new stimulus measures should be reported in this framework to strengthen the credibility of the public finances. This is important for the smooth financing of Turkey’s large external funding needs, projected at 20% of GDP in 2017.”
The OECD report notes that Turkish monetary policy was tightened after the coup attempt in response to a sharp exchange rate depreciation which “raised inflation and inflation expectations.” In addition, inflation rose to double digits in 2017, reaching 11.9% in April, far above the 5% target.
Uncerta nt es rema n h gh
The OECD report concludes that “private consumption and investment are projected to settle on a moderate path” as the impact of exceptional incentives fades. “Given continuing regional geopolitical tensions, and prior to [the General Election] in 2019, growth is projected to edge up to around 3.5% in 2017 and 2018. If long-delayed economic reforms are implemented, confidence could improve and growth could be stronger.
“If instead geopolitical strains or domestic political tensions worsen, or if relations between Turkey and the EU and the planned renegotiation of the Customs Union agreement suffer, business confidence, investment and growth would be weaker and tensions may arise in securing the large external funding needs – including the rollover of the significant external corporate debt stock.”