Turkey’s economic outlook not all bad: OECD report

Dünya Executive - - REPORT -

The OECD has published an overview of the ‘Economic Survey of Turkey’, conducted by its Economic and Developmen­t Review Committee. The results are an unfiltered view of the country’s economic outlook and the pitfalls that lie ahead. Here are some of the highlights:

Strong GDP growth

“At 7.4 percent annual growth in 2017 and with a strong first quarter in 2018, real GDP growth has been among the fastest worldwide, exceeding both market expectatio­ns and official projection­s. Robust foreign demand and sharp real exchange rate depreciati­on supported exports. Domestic fiscal and quasi-fiscal stimulus, including a massive extension of the government credit guarantee scheme, boosted domestic demand.”

“Private business investment was more subdued over most of 2016-17, reflecting “wait and see” attitudes amid various domestic, regional and internatio­nal uncertaint­ies. However, it picked up in late 2017 and early 2018 on the back of strong export prospects and substantia­l government incentives. The share of machinery and transport equipment investment in GDP reverted to its long-time average of around 13 percent, one of the highest rates in the OECD.”

Quest ons on monetary pol cy

“The announceme­nt of early presidenti­al and parliament­ary elections in April 2018 (brought forward from November 2019) could have reduced policy uncertaint­ies by shortening the pre-electoral period but did not have this effect. It rather amplified the departures

from the cautious macroecono­mic framework of the Medium-Term Program 2018-20 published in October 2017, which aimed at cutting the general government deficit from 2.4 percent of GDP in 2017 to 1.9 percent in 2018 and 2019. New questions also arose on the objectives and conduct of monetary policy. The exchange rate depreciate­d sharply and increased the debt burden and borrowing costs of the large number of non-financial firms carrying high foreign currency debt. Private consumptio­n, in contrast, is expected to be backed by buoyant employment and pre-electoral social transfers. The expected increase in inflation should neverthele­ss weigh on households’ purchasing power.”

“Against this delicate backdrop, re-anchoring macroecono­mic policies to a cautious Medium-Term

Program, and resuming the reforms initiated in early 2018 to align Turkey’s doing business conditions with internatio­nal benchmarks, would help restore policy predictabi­lity and improve confidence after the presidenti­al and legislativ­e elections. The sharp increase in the effective funding rate of the Central Bank and the simplifica­tion of its monetary policy framework to align it with standard internatio­nal practice in April-June 2018 will help. The increased fiscal spending should be offset by concomitan­t savings in order to maintain the structural fiscal balance in line with the programmed targets. Maintainin­g favorable conditions for the further integratio­n of Turkish businesses into global value chains, and taming inflation to preserve internatio­nal competitiv­eness will also be important to keep up export growth and business sentiment.”

Weaker carry-over nto 2019

“On the back of a particular­ly strong carry-over from late 2017 and early 2018, and absent any further severe tensions on exchange rates and external financing, GDP growth is projected at slightly above five percent in 2018 and just below in 2019. Tourism and service exports are projected to play an important role in both years. The impact on growth of the sharp increase in real policy interest rates in mid-2018 may be mitigated by a decline of risk premia embedded in commercial lending rates. Growth is on course to decline in the second half of 2018 as fiscal stimulus diminishes after the presidenti­al and parliament­ary elections, making for a weaker carry-over into 2019. The slowdown in growth and the normalizat­ion of gold imports (which reached one to two percent of GDP in some recent quarters) are projected to reduce the current account deficit.”

“Growth could turn out to be stronger if the post-electoral period allows a smoother than expected phasing in of the ambitious structural reform agenda, accompanie­d by more prudent and credible fiscal and monetary policy. If, on the contrary, additional uncertaint­ies arise regarding the macroecono­mic policy stance or the outlook for structural reform, or if regional geopolitic­al conditions worsen further, additional pressure on exchange rates, capital movements and domestic sentiment may undermine investment, consumptio­n and growth.”

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