Turkey Country Report Jun17 - June, 2017

July 10, 2017

Turkey’s GDP growth recovered in the first quarter to 5%, springing back from a drop of 1.3% just two quarters ago, while calendar-adjusted industrial production index moved up by 6.7% y/y in April, marking the best growth in output recorded in 20 months and exports surged 16% y/y in May.

Business confidence index rose 3% m/m to 112.4 in June, the highest level recorded since May 2014’s 113.5. The capacity utilisation rate (CUR) of Turkish manufacturing rose further to 79% in June, the highest figure recorded since August 2008’s 81.9%.

Leading indicators hint at a strengthening economic recovery in the second quarter, the central bank said on June 22 in the minutes of its latest Monetary Policy Committee (MPC) meeting.

President Recep Tayyip Erdogan, meanwhile, continues to rule by decree under a state of emergency introduced almost exactly a year ago after Turkey's failed coup attempt. After the country’s largest business association raised anxieties about its duration, he defiantly declared, “The state of emergency will never end — not until there is peace and welfare in the country”. Also giving some investors the jitters when it comes to the security of investments placed in Turkey is the fact that the president, having narrowly won April's referendum on introducing an executive presidency, now has the authority to essentially control the executive, the legislature and the judiciary, with near-total judicial and parliamentary immunity.

Add to those anxieties Ankara's ongoing spats with the EU over its receded prospects of membership, the jailing of journalists and seizing of businesses, the massive purges against anybody and everybody allegedly associated with the Gulenist network the government claims was behind the failed putsch, and rows with Washington over the arming of Kurds in the Syria conflict – it is easy to see why Erdogan might have felt the need to flood the veins of the economy with loose credit, tax cuts and other stimuli. But, for now, it's paying off.

Ministers certainly face an unenviable set of woes in the struggle to maintain expansion in Turkey, weighed, among other things, by an absence of much-needed foreign direct investment. Foreign investors fear structural economic reform is taking a back seat and partly as a consequence FDI fell from 2007's record $22bn to $12.3bn last year.

Other big difficulties include double-digit annual inflation (although in June it eased to 10.90% from 11.72% in May) and a substantially weakened Turkish lira, which has toppled from 2.83 to the dollar to as low as 3.94 in the past year, though it has lately been trading at closer to 3.50.


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