The future is the most difficult part of forecasting. An old joke, true as ever, especially in Turkey. Herewith an overview of some macro-economic developments in 2015 and my (partly) personal predictions for 2016. And some observations on the structural road ahead.
Summary/base scenario: Turkey is set to become one of the five largest economies in Europe. This will be accomplished because of a steady and an annual growth of 3-5% together with a population growing to 100 mln in the coming decades. Turkey’s economy will continue to internationalize, including more investments in countries like the Netherlands. Its role as a bridge between continents will be strengthened, benefitting Turkey economically.
Upward potential: if (but this is really a big ‘if’) Turkey manages to at least partially become a high tech and innovation inspired economy, growth and wealth will increase much more than the base scenario of 3-5%.
Risks: the political turmoil in this region is the big unknown. Political developments may have a substantial, negative influence on the Turkish economy.
But, history shows that the Turkish Republic has weathered many political storms. I am confident it will continue to do so.
Structurally…..one should realize that the Turkish economy has some strong components that constitute a solid buffer preventing any downward trend from going into a too negative spiral.
Are there structural challenges? Yes. In addition to the uncertainty related to an high tech economy, there are challenges related to the financing of the external environment. This applies in particular to Turkey’s capacity to attract Foreign Direct Investments.
Some economic figures 2015 and 2016
GDP growth reached 4% in the 3rd quarter of 2015. For the whole of 2015 growth will be just over 3%, resulting in a GDP of approximately 722 bln USD with a per capita GDP of 9.300 USD (IMF figures), down (because of currency effects) from the 800 bln USD in 2014. At present Turkey is the #18th economy in the world, just behind the Netherlands on #17. Corrected for Purchasing Power Parity however it would be the 17th biggest economy; its per capita GDP would then be an impressive 20.300 USD.
The 2016 growth is again around 3%, but remains vulnerable to external (political) shocks. Russian sanctions might cause a slower growth of 0.5%, although my prediction is that early spring 2016 the bilateral relations will normalise. The 1 November elections of 2015 provided the government with a strong mandate, but did not prevent more political unrest: in addition to the Russian crisis, the Kurdish conflict inside Turkey deepened, the situation in Syria became more complex and also Iraq remained in a very precarious situation.
The government budget shows a small deficit: -1% of GDP in 2014. It is expected to be -0.7% both in 2015 and in 2016 (below the 3% Maastricht norm). The official public debt was 35% in 2015 (Maastricht norm: 60%). It will rise in the coming years (to 40% in 2016), after having gone down in the previous 10 years. This being said the AKP-governments have proven to be fiscally prudent and disciplined, also in election years. The overall external debt (both official and non official) is higher though, approximately 52% of GDP in 2015, much of which needs refinancing in 2016.
Foreign Direct Investments are an important source to finance external debts. Over the past years FDI amounted to 12-13 bln USD per year. FDI in 2015 promises to be higher, up to 2% of GDP. In the longer run however the overall FDI context looks mixed. For foreign investors, in addition to a country’s economic potential, anti-corruption policies and judicial independence are important considerations whether to invest. On the Transparency International Anti-Corruption index Turkey occupies #64 of 175 countries. On the rule of law index 2015 it dropped to #80 out of 102 countries surveyed.
Inflation remains on the high side, around 8%. In historic perspective not bad, but higher than in many other countries. The government assumes that this percentage will go down, but according to most observers inflation is more likely to stay above 7% in 2016. The effect on the inflation of the lower oil price is less than expected and there will be an upward pressure on inflation because of the higher minimum wage of +30% per 1/1/2016.
The unemployment rate most likely will hover around or remain a bit above 10% in the coming few years, before perhaps going down towards the end of this decade. The EU average is at present 9.3%. One important, very uncertain factor, are the more than 2 mln Syrian refugees.
The current account deficit was 8% of GDP just a few years ago, half of which due to energy imports. Lower energy prices led to a lower deficit in 2015, but the 4.7% deficit of 2015 remains too high and partly explains the pressure on the Turkish lira. Exports of goods disappointed in 2015 (-5% in dollar terms), while also income from tourism (Russian boycott on top of already depreciated rouble) dropped. Both export of goods and income from tourism might show improvement next year, then leading to a further (but most likely only small) narrowing of the current account deficit.
A favourite topic at any Turkish dinner table is the exchange rate of the Turkish Lira. After its weakening during most of 2015, the Turkish lira will ultimately continue to soften in 2016. It might, according to some, briefly even touch 1 euro for 4 TL and 1 USD for 3.50TL somewhere next year. But…with currencies one never knows and the Central Bank’s key rate of 8% provides some intrinsic strength to the TL.
The private consumption will be 3.6% in 2015 and 2.8% this year. After the 1 November 2015 elections consumer confidence sharply rose to 77, however still below the 100-line, which divides pessimism from optimism. The Producers’ Manufacturing Index rose to just over 50 in November 2015, indicating an expansion of the manufacturing sector.
The following points underline why the 3-5% base scenario is realistic.
Turkey’s population is young and well educated, people work hard and are entrepreneurial: the Global Entrepreneurship Index 2015 places Turkey on #28 out of 132 countries. Turkey has some strong and internationally competitive sectors: construction, logistics, tourism, manufacturing (egg car production #4 in Europe, #1 white goods), textile and agriculture.
The World Bank “Ease Doing Business 2015” puts Turkey on #55 out of 189 countries. The Davatoglu government has a market economy orientation and is committed to a series of (overdue) reforms.
A very strong side of the Turkish economic structure is its solid financial system, which became manifest during the 2008 crisis. There are independent monetary authorities, an excellent statistical bureau and an independently functioning Central Bank.
Turkey truly is on the crossroads of three continents and as such well positioned to connect to more distant, but promising markets. In addition Turkey will continue to profit from its close ties with the EU, the biggest economy in the world.
The base scenario of 3-5% growth, although attractive in itself, is of course not enough to realize the key 2023 ambitions of Turkey: #10 economy in the world, a per capita income of 25.000 USD, a GDP of 2 trillion USD or an export of 500 bln USD. For this an innovative, R&D based and High Tech inspired economy is needed.
However for Turkey to become an innovative R&D based and High Tech inspired economy there are some serious policy issues…
as the country needs a renewed education system, a new way of working together where trust and open sourcing are the norms and where its inhabitants speak foreign languages. South-Korea, Taiwan and Japan have shown that the right mixes of government intervention, private entrepreneurship and pro innovation policy can do wonders. We will see, but the present rankings of Turkey in some crucial fields are insufficient so far: ICT development index 2015 places Turkey on #69, two places lower than in 2010 and the Global Innovation Index 2015 on #58 out of 141 countries. On the last PISA survey of 2012 we see Turkey on # 44 of 65 for math, #43 of 65 for science and #41 of 65 for reading. The English language is a challenge: on the 2015 English Proficiency Index Turkey ranked 50 out of 70 countries; in Europe #26 out of 27.
As this is a New Year’s blog I should end with the World Happiness Index 2015. Here we find Turkey on place #76 out of 158 countries. Not bad, but there is room for improvement. My wish for the New Year is that Turkey will quickly move up this Happiness Index!