Turkey's Asian-style growth

By bne IntelliNews January 18, 2012

Justin Vela in Istanbul -

On January 5, Turkish Deputy Prime Minister Ali Babacan forecasted that the country's economy expanded 7.5% in 2011 and will grow another 4% in 2012, in widely reported comments made to a business delegation in Ankara. Turkey did indeed power ahead in 2011 while other economies in the region stagnated and shrunk, though many see this as a last hurrah before the economy hits a wall later in the year.

In the third quarter of 2011, Turkey's economy grew a better-than-expected 8.2%, according to TurkStat. The market consensus for third-quarter growth had been only 6.7%. It was also announced that first-quarter growth had been revised up from a preliminary 11.6% to 12.0%, while second-quarter growth was 8.8%. This means that in the first nine months of the year, Turkey's real GDP growth was 9.6%.

The figures show a continuation of Turkey's impressive economic growth, though most analysts agree the country's economy will now slow. By how much is the big question.

Brick walls

Speaking at a conference on January 12, Merrill Lynch economist Turker Hamzaoglu disputed Babacan's optimistic forecast, suggesting that the Turkish economy might experience no growth in 2012.

There is a consensus that growth will largely be dependent on events in the Eurozone. About half of Turkey's trade is with EU countries and its economy is closely linked to the health and prosperity of these states. Babacan has warned that Turkey must decrease its dependence on European markets, but the extend to which the country can successfully diversify its trade to other markets is open to question.

In 2010, over 75% of Turkey's foreign direct investment came from the EU. In recent years, Turkey has been relatively successful in exporting to elsewhere in its region: to Russia, the Middle East and Central Asia. However, these countries have their own problems and the Middle East and Central Asia are hardly stable markets themselves.

Turkey's key economic tumbling block remains its massive current account deficit that is expected to come in at 10% of GDP for 2011, up from 6.7% in 2010, according to the International Monetary Fund. In November, the current account deficit actually shrank, bringing the 12-month cumulative deficit down to $77.8bn, its first such decline in about two years. Turkey's central bank predicts the country's year-end current account deficit will stand at around $73.6bn. "More limited foreign financing would constrain the current account deficit to about 8% of gross domestic product and compress imports," suggests the IMF in reference to how a slowdown in the Eurozone might limit Turkey's ability to finance the current account deficit.

Other key vulnerabilities are Turkey's high rate of unemployment. In October, the unemployment rate was 9.1%, according to Turkstat. Yet Turkey has actually been more successful in combing rapid economic growth with job creation than Europe has. The International Labour Organisation's (ILO) cites Turkey as the top country in the region for combing growth and job creation in its Global Employment Trends 2011 Report.

Murky middle ground

For several months, economists interviewed by bne have suggested that Turkey will see about 2% growth in 2012, a similar figure in 2013, and then, ideally, return to a more sustainable 4-6% growth rate after that.

The IMF concurs with the expected 2% growth rate for 2012, urging the government to adjust its fiscal policies to ensure a soft landing. Turkey's economy has changed from being seen as a star in an economic crisis to a liability for stable investment.

Experts argue the country must make serious structural reforms to its economy - and the expected slowdown gives the country the opportunity to do just that, analysts argue. "We need many imports for our exports because the value added that Turkish industry appends to products is still very low," businessmen Bulent Eczacibasi, chairman of Istanbul-based Eczacibasi Holding, told local newspaper the Sunday Zaman. "We have to produce and export products with more value added. This is not something you can fix overnight, but the country is on the right path."

The construction sector grew by 10.6% in the third quarter; wholesale trade grew by 9.6%; manufacturing by 8.9%; financial institutions 15.8%; transportation by 9.7%. In November, gold was one of the main financial investment tools in Turkey, according to TurkStat, implying people are starting to worry about inflation, which in November hit 9.48%, far higher that the central bank target for year-end of 5.5%.

Domestically, politicians and a supportive media are cheering the prospect of continued growth, and snide comments are being made comparing Turkey's stellar growth to Europe's looming recession. Critics of the government's economic policies are blasted in the local media. On January 16, one newspaper close to the government bizarrely published a column linking a May 2011 attack on Prime Minister's Recep Tayyip Erdogan's campaign convoy (the PM had left the convoy) to critics of Turkey's economic policies, because it came not long after he had made a speech stating the government's goal was zero interest rates. The central bank's insistence on an ambiguous low-interest rate policy has long been a chief criticism, mainly of international observers.

The country is second only to China among the G20 in terms of growth. But the question now is, how will Turkey handle the slowdown?

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