Turkey: Year in Review 2012

After watching growth top 8% in 2010 and 2011, Turkey is now seeing its economic expansion ease amid a slowdown in growth both globally and in the eurozone, the impact of civil war in Syria and the doubling of interest rates throughout 2012. Increased focus on domestic demand and exports could see growth rebound in 2013, however.

Growth in the third-quarter of 2012 reached 1.6%, down on the 2.6% expected by analysts, and industrial production fell 5.7% in October. The impact of the ongoing economic crisis in Europe was evident in Turkey’s export figures for 2012, with sales to the bloc down 6.5% to $120bn for the first 10 months of the year. Data issued by the Turkish statistical institute, TurkStat, showed that sales to EU countries made up 38% of total exports in September 2012, down 10 percentage points on the same period of 2011.

However, the fall was offset by a rise in exports to other countries, led by Iraq, Russia, Iran and China. Exports to Iraq were boosted by Turkish firms from the energy extraction, commerce and construction sectors investing and expanding in the country.

There was more good news in November when ratings agency Fitch revised its assessment of Turkey’s economy to investment grade. The agency lifted Turkey’s long-term foreign currency issuer default rating (IDR) to BBB- from BB+, and its long-term local currency IDR to BBB from BB+, while setting the outlooks on both ratings as stable. Still, other agencies have yet to follow Fitch’s lead.

“Turkey has received investment grade status from Fitch; however, most international funds require a country to have two such ratings before they authorise market entry,” Martin Spurling, the CEO of HSBC Turkey, told OBG. “Thus, in terms of attracting more liquidity into the domestic economy, the second upgrade will be just as important as the first.”

Inflation, which hit double figures in the first half of 2012, began falling in the second part of the year. TurkStat figures from early December showed year-on-year consumer inflation had fallen to 6.37%, continuing a downward trend from 9% in September, 7.8% in October and 6.4% in November. The drop suggests that the final inflation figure for 2012 could prove to be closer to the central bank’s year-end target of 5% than many analysts’ mid-year expectations. Inflation should fall further in 2013 in line with an expected drop in the consumer price index (CPI), which is forecast to drop to 5.3% next year.

However, demand for imported goods also eased in 2012 on the back of interest rate rises and curbs on lending growth. The bank has adopted a policy of variable rates, ranging from 5.75% to an upper-end 9%, which was put in place in mid-November when the bank trimmed 50 basis points off the high end of the rates bracket. The reserve is considering further reductions to encourage borrowing, which could be introduced early in 2013 if inflation remains under control.

Unemployment, however, stood at 8.8% in August, which, although high, is down on the 9.2% from a year earlier, according to TurkStat. Turkey’s jobless figure has continued to fall since peaking at almost 15% in early 2009, although the high number of school leavers and university graduates entering the labour market annually has made tackling unemployment a challenge.

The ongoing conflict in neighbouring Syria is weighing on the economy as well. The violence has cut one of Turkey’s main land export routes to the Middle East, and the growing number of Syrian refugees, which now exceeds 120,000, is putting pressure on Ankara’s budget.

Concerns remain that the conflict in Syria could spill over the border or further heighten internal tensions between the state and the Kurdistan Workers’ Party (PKK), which risk weakening investor sentiment and impacting tourism.

The minister of finance, Mehmet Simsek, has forecast growth of at least 4% in 2013 and 5% in 2014, but he has admitted growth for 2012 is likely to come in at under 3%. The government’s target at the beginning of the year was 4%.

Both domestic demand and exports, with the exception of gold, will need to be supported this year in order to see real growth in the wider economy. However, given Turkey’s track record for weathering storms, there much to indicate the country will rally in 2013 and see a solid economic performance.

“Elevated levels of risk and uncertainty may continue to sap the strength of the global economy in 2013,” Berat Albayrak, the CEO of Calik Holding, told OBG. “However, over the past several years the Turkish market has repeatedly demonstrated its stability and resiliency in the face of adverse external conditions.”