OPPORTUNITIES & CHALLENGES OF TURKISH ECONOMY
As a bridge uniting Asia and Europe, Turkey’s economy continued to strengthen in 2017. With a GDP of 858 billion US dollars, Turkey is the 17th largest economy in the world1. After the global financial crisis in 2008-2009, Turkish economy managed to grow by 6.8% and Turkey’s 2017 GDP growth is expected to remain strong, with levels close to 7%. Figures are well above the rates of other developing countries as well as EU and prove the dynamic nature of the Turkish economy. Going forward, according to IMF’s recent estimate, Turkish economy will grow by 4% in 2018, which is higher than Emerging Europe and LATAM countries and double that of the growth of the EU. Indeed, the revision of national accounts in 2016 and current high momentum in economic activity resulted in a higher potential growth rate, which is 5.5% according to a more recent article of the Central Bank.
Fiscal discipline, sound monetary policy, a strong and well-supervised financial system and a reform agenda continue to be the main pillars of Turkey's economic program. Turkey’s central government is expected to run a budget deficit c.1.5% in 2017. The general government debt stock ratio has been meeting the EU Maastricht Criteria of 60%, since 2004.
Another important factor that supports the growth profile is the demographics of Turkey. Turkey has a sizable, young and growing population. With around 80 million people, Turkey has one of the highest populations in Europe and the CEEMEA countries. 55% of the Turkish population is under 35 years-old and the labor force is constantly evolving towards a more qualified level with increasing participation of women. In 2030, the population is expected to reach 88 million, compared to negative growth in Europe and the CEEMEA region.
One of the main challenges Turkey faces is the gross external financing needs summing up to around 25% of GDP per year. High dependence of the production on intermediate goods imports and being in the lower part of the global supply chain result in both higher trade and accordingly current account deficit as the Turkish economy grows. Hence, it gets vital for Turkey to attract capital inflows in order to finance the deficit. This fact recently poses challenges as Central Banks of the advanced economies, especially the FED, continue to withdraw from the accommodative monetary policies. The likelihood that the monetary policy normalization could be gradual in advanced economies may alleviate the pressure on emerging markets by giving more room to apply necessary reforms as capital inflows would remain moderate despite the likely increase in the cost of financing. To this aim, the economy management in Turkey has already started to implement some structural reforms such as increasing incentives for savings and lowering intermediate goods imports by means of replacing with domestic production.
Another main challenge could be the currency mismatch problem of the corporate sector with an open FX position of around 25% of GDP. It exacerbates vulnerabilities of the economy to external shocks as exchange rate volatility could get higher during turbulence in global financial markets. Meanwhile, to tackle the problem, the economy management has initiated certain measures such as non-deliverable TL forward contracts and some limitations of foreign currency loans under a risk exposure of 15 million dollars. Furthermore, the bigger companies will also be required to hedge in the coming months. All in all, together with the program initiated to increase savings, both external financing needs and vulnerabilities in the economy could be diminished as the Government continues to pursue indispensable structural reforms.
1 IMF's World Economic Outlook Report dated October 2017. Ranking as of YE 2016