Economic Snapshot of Turkey
This article, written in April 2013, was published originally in “Turkey Real Estate 2013” in July 2013…
When I was writing for Turkey Real Estate last year, one of the questions that were discussed in my article was whether it was time for re-balancing in Turkey. 2012 indeed turned out to be a year of rebalancing for the Turkish economy, with the amount of adjustments surpassing expectations.
The biggest adjustment occurred in the GDP growth rate. What was peculiar about this adjustment was that it was the first policy-led slowdown. After having grown by an average of 9% during 2010-2011, Turkey’s domestic demand started to show signs of overheating. During those two years, while the domestic demand made a contribution of close to 12% to the GDP growth rate, foreign demand brought the growth rate down by 3%. While growth in investments is generally welcome, the pace of growth in credit and current account deficit were signs that a slowdown was necessary. Domestic demand contracted by 1.9% in 2012, mainly due to the Central Bank of Turkey’s unconventional policy mix. The economy grew by a mere 2.2% with a 4.1% positive contribution of foreign demand.
Overheating in domestic demand was accompanied by a surge in domestic credit. While the credit growth rate was almost 34% in 2011, the credit to GDP ratio increased by more than 10% between 2009 and 2011. During that same period, the current ac- count deficit rose from 2% to 9.7% of GDP. Alarmed by the pace of increase in credit and by the level of the current account (CA) deficit (and having identified a close relationship between the two), the CBT set financial stability as its priority in ad- dition to price stability and undertook measures to curb the credit growth rate. By the end of 2012, credit growth rate slowed down to 17% while the CA deficit was at 5.9% of GDP.
What should we expect in 2013?
As regards the performance of the economy in 2013, it is widely considered that while the growth rate will accelerate above 4%, the CA deficit will increase to around 7% of GDP with a credit growth rate of 15-20%. These aver- age market estimates basically mean that the market is expecting an end to the rebalancing in 2013.
While it is probable that all these indicators will re-accelerate in 2013, the question for 2013 should not be whether re-balancing has come to an end but whether there are any signs of structural change in the current account deficit. There are three areas where one could look for these signs:
Will export diversification be followed by product diversification?
2012 was a successful year for Turkish exporters as
they overcame the sluggish European markets by diversifying in the MENA region. They exceeded the estimates and achieved a 13% growth. Yet, recent studies show that the added value of exports to the Turkish GDP is one of the lowest in the EU (IMF WP 13/62). Although Turkey has saved the day by exporting to other markets when its traditional markets are contracting, product diversification in 2013 trade data could justify a longer-term optimism.
Will there be an increase in the savings rate?
One of the main problems of the Turkish economy is that the savings rate has been dropping continuously. Domestic savings must be increased before dependency on foreign savings can be reduced. As of end-2012,
the savings rate was 14%, down from over 20% in the 90s. The government is taking measures to increase private savings through an incentivized private pension scheme. While the scope of this scheme is unlikely to be a panacea for Turkey’s low savings, any data release on savings should be closely followed, especially in a negative real rate environment.
Was the fall in real interest rates a shock to the Turkish economy?
Turkey had traditionally high real interest rates prior to 2009. Yet, after 2010 real interest rates fell from an average of 8% down to an average of 2% during 2011 and 2012. At the time of writing in spring 2013, they are in the negative territory. While it is still too early to prove statistically that the drop in interest rates had an impact on consumption and hence on the CA deficit, the constant overestimation of imports by analysts since mid-2012 can be a sign that part of the ex- plosion in 2011 imports was a bubble created by the one-time-fall in real interest rates. 2013 imports and analyst forecasts should be monitored closely to test this theory. If it is confirmed, policy makers can have more space for maneuvering around the CA deficit and leave more room for optimism.