Despite having to weather a combination of regional instability, domestic volatility and a hotly contested election season last year, Turkey’s economy began 2014 with a surprisingly strong performance.
First-quarter growth reached 4.3%, far higher than the estimates given by the International Monetary Fund (2.3%) and the World Bank (2.4%). Sound fundamentals look likely to keep Turkey’s growth prospects on track throughout 2014 and into next year, although analysts remain concerned about the impact of external risks, such as high energy prices and regional tension.
December’s announcement that the US Federal Reserve would begin tapering its purchases of bonds by about $10bn each month sent shocks through the world’s emerging markets, including Turkey.
However, while the move triggered declines in the Istanbul Bourse throughout January and February, first-quarter GDP growth rose 1.7% quarter-on-quarter (q-o-q), according to Turkstat, even as private sector investment fell by 1.3%. The Central Bank’s current drive to contain domestic credit and currency fluctuations looks equally unlikely to dampen Turkey’s growth prospects, with the government saying it was confident the country would reach its full-year-growth target for 2014 of 4%.
January saw the Central Bank increase the interest rate by 500 basis points in reaction to global monetary tightening. While the move helped to contain Turkey’s current account deficit and improve risk premium indicators, by June, more favourable conditions led to the bank lowering its main interest rate 25 basis points.
The bank’s governor, Erdem Başçi, has hinted that further cuts could be possible. “A measured, moderate and gradual rate cut is being priced in,” he said. “We will do it as long as the Central Bank continues to believe that inflation will decrease. But we will do it with caution, without upsetting the balances, without destabilising.”
Despite the positive developments, however, analysts remain cautious about the impact of internal and external risks on Turkey’s economy. The World Bank reduced its annual growth forecast for the country from 3.5% to 2.4% in its Global Economic Prospects report, citing weakening business and consumer confidence among its reasons.
Analysts at Bank of America Merrill Lynch (BoAML), meanwhile, voiced concerns that overly high valuations on Turkey’s capital markets could spark a downturn. Turkey’s benchmark gauge was up 14% between local elections on March 30 and mid-June, outperforming the MSCI Emerging Markets Index by 7.7 percentage points and trading at 10.9 times projected annual earnings, according to Bloomberg.
Speaking to the data and media company, BoAML analysts Turker Hamzaoglu and Ali Birdal pointed to Turkey’s vulnerability to high-energy prices and geopolitical tension in the region. A 10% decline in exports to Iraq and a $10 increase in oil prices could add 0.2 percentage point and 0.5 percentage point to the current account deficit.
Authorities in Turkey budgeted for 2014 on an estimated average Brent oil price of $103.2 per barrel, while energy imports for the year were expected to reach $61bn and the current account deficit stood at $55.5 bn. However, on June 19 the Brent oil price reached $114.59, and political instability in Iraq, Syria and Ukraine could see higher prices squeezing the domestic economy.
Yet strong fundamentals have provided a solid foundation for key sectors of Turkey’s economy. Industrial production rose during the first quarter, with average growth reaching 5.3% year-on-year (y-o-y), up from 4.4% in Q4 2013.
Turkey’s economic resilience has also helped the country garner newfound investor confidence. Lockheed Martin, for example, recently announced plans to manufacture, assemble and repair F-35 fighters at a new plant in Izmir. A factory marking the first phase of the project, which was completed in June at a cost of around $75m, is expected to provide up to 700 jobs.
June also saw the State Oil Company of Azerbaijan (SOCAR) sign loan agreements with Turkey worth approximately $3.29bn. Some of the funds will be used to build a new oil refinery, which will produce naphtha and ultra-low sulphur diesel fuel. The plant is expected to be operational by 2018.
The introduction of locally refined products to the market could play a key part in reducing the nation’s current account deficit – widely recognised as the structural problem of Turkey’s economy – as long as supplies of crude remain stable. The current account deficit had edged downwards to 7.4% of GDP in the first quarter of 2014 from 7.9% in the previous quarter, while domestic savings rose from 12.2% to 12.4%.
External shocks are expected to remain a cause for concern in Turkey. However, structural gains should prevent global and regional risks from dragging down full-year growth or evolving into defining features of the country’s economy.
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Register Here×The Turkish Prime Minister Bulent Ecevit has spent the last week in the US hoping to garner support for economic reforms at home and trade concessions for Turkish exports to the US.
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The Turkish Prime Minister Bulent Ecevit has spent the last week in the US hoping to garner support for economic reforms at home and trade concessions for Turkish exports to the US.
