Despite slower-than-expected economic growth in the third quarter of 2012, the Turkish economy will likely return to stronger - but still moderate - expansion in 2013, the European Bank for Reconstruction and Development (EBRD) forecasts in its latest economic outlook.
The report expresses cautious optimism that Turkey will join the rest of CEE in benefiting from receding risk in the Eurozone, not that the country has struggled too much over the past year compared with most. The development bank hopes that deceleration in the region may have bottomed out, and that confidence will help get economies back on track as "the likelihood of further deterioration of the Eurozone crisis diminishes."
Turkey's relatively loose links with the troubled Eurozone - aside from its reliance on bank finance - helped the country ward off the worst of the effects of the crisis last year. Still, it stands to benefit from reduced risk in the single-currency area that the EBRD forecasts for 2013, which will see it put in relatively moderate growth at 3.7%, the development bank's analysts predict. Overall, the EBRD expects growth in the transition region to rise to 3.1% this year.
After a strong growth performance fuelled by a credit boom in 2011 that saw GDP expand by 8.5%, the Turkish economy slowed significantly in 2012, with the EBRD predicting the final figure for the full year will come in at 2.6%, the most damage being done in the third quarter with a disappointing expansion of just 1.6%.
However, in many ways the crisis has helped Turkey, which was (and still is to a significant degree) at risk from the huge current account deficit built up by 2011's domestic demand driven boom. The slowdown knocke,d confidence, which reduced demand for imports. Ankara has, therefore spent the year orchestrating a "soft landing," and has been highly successful so far, with monetary tightening throughout the year aided by the impact of high oil prices and weakening external conditions on investor confidence.
"The decline in domestic demand reflects a sharp slowdown in credit throughout the year," the report notes. Overall, credit growth fell from 33% in December to 18% in November, as the central bank tightened liquidity provision and increased lending rates.
On top of growing exports and declining oil prices that has helped the current account deficit - exposing the country to shocks in the European banking system, which funds it - has dropped from double digits at the start of the year to reach 6.7% of GDP in November. It's notable that the strong improvement in exports in particular comes on the back of a shift from Europe to new markets in the Middle East and North Africa.
All of which helped lead to the "euphoria" in Turkey towards the end of 2012, when Fitch Ratings ended the country's 20-year wait for a return to investment grade. "Concerns over a hard landing for the Turkish economy have not fully materialized, and instead, the easing of macro-financial risks and the fact that Turkey had managed to rebalance the economy while avoiding recession led to an upgrade by Fitch of Turkey's long-term foreign currency credit rating to investment grade," the EBRD notes. "This has led to improvements in leading indicators and business confidence, pointing to a possible pickup in economic activity in the fourth quarter. Nevertheless, the weaker-than-expected Q3 figures have prompted a revision of end-year growth forecast from 3.0% to 2.6%."
The bank's chief economist, Erik Berglof, said, "For the first time in a long while we are now seeing the possibility of a reduction in the risks facing emerging Europe, especially the risks from the eurozone. It is too early to sound the all-clear but there are signs of stabilisation."
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