Expectations for the Turkish economy
My basic expectation regarding 2018 can be summarized as follows: As long as there are not any foreign shocks, 2018 will be a year we will get by. But there is nothing to get excited about.
In my view, there will not be a major external shock. The U.S. Federal Reserve and European Central Bank will continue to pursue policies consistent with their earlier announcements. The relationship with the U.S. will remain rocky but will not deteriorate to the point of ridiculousness, such as sanctions that would challenge our economy. We will soften our stance on Europe. Regional foreign policy will continue with balanced steps. Oil and gas import prices will continue at their current levels. There won’t be snap elections.
The current unpleasant situation between various segments of society will continue and we will have to live with the state of emergency for a while. There won’t be any new democratic initiative. There won’t be any significant structural reform on education. In the absence of snap elections, there will not be any fiscal policies to spur domestic demand.
The Central Bank will continue with its current policies: It will grudgingly accept a much higher inflation rate than the 8 percent target, perhaps around 10 percent. It will not hike rates. On the other hand, it will react and hike rates in the event the foreign exchange rate jumps suddenly and the jump appears to be permanent.
According to this scenario, it seems difficult for domestic deposits and credit rates to fall below their current levels. First of all, the high loan-to-deposit ratio reduces the option to open new loans, and the banks are in for deposits. Secondly, inflation creates a lower limit for the deposit interest rate. For the same reason, it’s not so easy for the Central Bank to step in to reduce the deposit deficit by funding banks more than usual, and for the banks to have more funding. Under these conditions, it would only be possible to open more loans with more foreign borrowing, and the conditions are not conducive for that.
2018 won’t be so “exciting”
The constraints I mentioned may pull down our growth rate in 2018. It may be compensated by a fiscal policy that will boost domestic demand. However, assuming that there won’t be a snap election in 2018, and if the presidential election remains on schedule, there is no reason to loosen the fiscal policies already in place.
The fiscal expansion policies pursued ahead of the April 2017 referendum could deteriorate an already overburdened balance sheet which in turn could create a political risk ahead of elections. Another way to compensate for this decline in growth may be to increase exports. The European economy is recovering, and that’s good news for our exports.
If you add all of these factors together, it’s possible to see why 2018 won’t be so exciting, at least in terms of our growth rate. Estimating the growth rate is much more difficult with the new calculation method of TurkStat so I will avoid doing that.
Let me be clear: by “not exciting” I mean that we may remain significantly below 2018 growth rate projections and around our historical growth rate (whatever the figure is after TurkStat’s new calculation method). The unemployment rate (especially youth unemployment) will contribute to this lack of enthusiasm. The downward trend that started in the last months of 2017 will not continue, and we expect a high and persistent unemployment rate. I do not expect exciting developments in machinery and equipment investments either and the main reason for that is the domestic environment I mentioned earlier.
Inflation will also prove a stumbling block for the economy in 2018. After a year of higher than average inflation (the average being around 8 percent), another year of rising prices will no doubt increase the average.
Based on my assumptions, and in particular my view that there will be no major external shocks and therefore no jumps in exchange rates, the upper level can be up to 10 percent or slightly higher. Jumping up to a higher step by another two points will not be a cure for the malaise, as we have already seen higher inflation rates in recent months.
A decline in growth rate
Given these factors, it doesn’t seem prudent to expect an exciting improvement in our current account, in part because energy prices won’t change. In fact, we should expect a decline in our growth rate.
In that case, imports should continue on their current course. As I mentioned, exports should improve along with the European economy. Tourism receipts are recovering. Under these circumstances, we can expect small fluctuations in the current account deficit to national income ratio.
Clearly, it’s possible the scenario in 2018 could change. We can only hope that the atmosphere will change in a positive direction relative to my assumptions. But when analyzed today, the possibility of a worsening situation is more likely. If there are substantial and long-lasting shocks, especially on foreign exchange, then I will have to change my predictions.