Growth to ‘edge up to 3.5%’ in 2018, report says

Dünya Executive - - BUSINESS -

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.”

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