Predicting the direction of the Turkish economy in the coming few years is not an easy task. Turkey is a multi-layered country on the crossroads of three continents, finding itself not only in the middle of very different civilizations, religions and visions, but also in the midst of many violent conflicts.
Political situations play a big role in any economy. By definition therefore politics have a central impact on the economic developments in Turkey. Mehmet Simsek, deputy PM, recently described the past year of 2016 as “an extremely challenging year amid a diplomatic crisis with Russia, global economic fluctuations, a failed coup attempt and escalating security concerns, but Turkey’s economy showed an extra-ordinary resilience. I believe risks in 2017 will be more manageable”.
I am writing this blog just after the terror attacks of December 2016 and of the beginning of January 2017; tourism and investors’ confidence will be negatively influenced again, I guess. At the same time I have to remind myself of one of my earlier blogs, on the proverbial resilience of Turkey and its economy. This country has been through many difficult phases before and it rightfully prides itself of always finding a way out and in case of economic problems bouncing back much quicker than many thought possible.
To summarize the economic situation
- The Turkish economy is facing serious problems and an economic recession (or even a crisis) seems unavoidable; according to some, Turkey is already in an economic crisis (pointing to Q3/2016 -1.8% GDP growth), others smile and think that the word ‘crisis’ is a too negative description for the present situation. For them the banking crisis of 2002 could be called a proper crisis, unlike a period of some negative growth as is on its way now.
- Leaving this semantic discussion about crisis, recession or temporary problems aside, it is clear that the present economic situation is not easy. However we should not forget three important factors: (1) the Turkish economy has many correcting and cushioning mechanisms (that amongs others will prevent its economy from falling through the floor), (2) over the years it has indeed proven to be very resilient in difficult times, always coming out of a recession much quicker than outsiders anticipated and (3) the Government, with its low debt and nearly balanced budget, will be able to continue stimulate for some time both private and public spending.
- Probably most important however is the long-term question, whether Turkey is sufficiently prepared for its transformation to a high tech, high added value economy. Here, in my opinion, the jury is still out.
- The Turkish economy is facing some serious headwind in 2017
No better way to feel the pulse of an economy than to walk around and see what happens in the street. No queues anymore at the airport, empty counters even, around the Consulate in Istanbul more and more signs “kiralik or “satilik” (for rent or for sale). From several sides I hear about bankruptcies. They started with small companies, often depending on tourists, now extending to parts of shopping malls and to the larger chains; payments are delayed or not done at all.
The substantial rise of the minimum wage per 1 January 2016 by 30% benefitted many ordinary Turks and as such it was a social success, but during the year it became clear it also led to the erosion of the profitability of many companies.
All eyes are on the Turkish Lira. This currency is under great pressure. A further depreciation (which is expected by most experts) will lead to rising inflation and lower internal consumption. To (partially) stop this depreciation a higher interest rate seems to be the most logic option, but this will hurt economic growth. Talking about being caught between a rock and a hard place! In the longer run the Turkish export will profit of course from a weakened currency, but the key construction and transport sectors will per saldo be negatively influenced.
One of the pillars of the Turkish economy over the past years was Foreign Direct Investment (FDI); on average 12 bln USD during the last decade; in the years 2005 and 2005 FDI even reached 20 bln+ USD. 2016 however was, not surprisingly, a disappointing year. The final figures are not known yet, but might be 50% less compared with 2015 and much of it is only in the non-productive real estate, not in ‘green field’ investments. There are no indications that 2017 will be much better. This will have consequences for the value of the Turkish Lira and in the longer run for the foreign transfer knowledge.
The overall (geo) political situation, both in- and outside Turkey, is difficult. The economic possibilities in Turkey are still here of course and those already in Turkey will stay, very much focusing on the long term, but new companies coming in are increasingly rare. Economics, as we should never forget, is not only a matter of statistics and profits, but is also about human interaction and perceptions.
Predictions about any economy are always accompanied by caveats concerning the political context. In Turkey this year the ongoing, unprecedented series of political developments will substantially impact the economy. This, by the way, might also have an upside in case some of the political problems are solved or become less serious.
Another somewhat sensitive issue is the perception of the predictably of to be expected policies. In many areas Turkey has a rather consistent policy, but among foreign companies and rating agencies there is concern on interest policies and the independence of important institutions.
Talking about rating agencies. The leading ones started to downgrade Turkey since mid-2016. Until then there was a steady upgrade as “Turkey showed a solid budgetary policy, structural reforms, robust FDI inflows against the background of a fast growing economy, but vulnerable for external shocks (both economic and political)”. As the impact of the external shocks started to increase and the positives to decrease, it was inevitable that the process of upgrading was to be reversed as well.
- But…Turkey has shown to be very resilient in the past and has a number of economic shock breakers to cushion negative economic developments
The geographical location of Turkey remains of crucial strategic value; it positively influences the transport sector and offers the opportunity for the development of several hub functions (like energy).
Turkey is known to be an extremely resilient society, one that knows how to deal with crisis, is prepared to go the extra mile (construction works in Somalia), it is a country of hard workers.
Turkey has a shared history with many parts of the world. At times these ties are not without complications, but in general the form the background for an interesting economic network (Balkan, Caucasus, Black Sea, North Africa, Middle East, Central Asia).
Turkey has a 650 years’ old orientation on Europe as well; in addition to its ties to so many other parts of the world Turkey qualifies to be a bridge as well to the Islamic (economic) world.
The young population (50% is below 30 years old) creates a dynamics that, if well channeled, cannot be found in many countries in Europe.
In a number of European countries, including in the Netherlands, there is a large part of the population that has Turkish roots. In balance this leads to a mutually productive exchange.
Turkey has a number of economic sectors that are internationally competitive: textile, car, metal, transport, construction, medical, tourism, chemical, finance. This will not change in the near future and will provide an important supporting floor to any economic contraction.
The banking system has a special position. It came out strongly after the banking crisis of 2001. It is well capitalized and should be able to handle a growing number of non-performing loans. Therefore, together with the Central Bank the overall banking sector continues to remain one of the strong players in the Turkish economy.
- In addition…the Government still has some room for maneuvering
Government finances are relatively solid, with only minor budget deficits over the past years. Together with the low official debt (32% of GDP) this should allow the Government to stave off a recession for the coming half to one year or, when a recession happens, to soften its impact by raising public expenditures and social transfers.
- Some figures 2016 and 2017
The economy grew by 4% in 2015. It had an excellent start in 2016 (1Q + 4.8%), but then slackened to ultimately -1.8% in Q3, the first quarterly contraction in 7 years. Depending on the results of the Q4 the 2016 growth might end up below 2%. The predictions by the Government for a 4+% growth in 2017 seem at present not attainable.
Inflation remained approximately the same: 8.5% in 2016 against 8.8% in 2015. The Government expects inflation to drop to 7% in 2017, but Turkish Lira weakening will most likely lead to a higher percentage.
The trade deficit remained approximately -4,5% of GDP both in 2015 and 2016. It might slightly increase this year. Government expects exports to rise to 155 bln USD, but higher energy prices might offset any export gain. Looking to services, tourism income was down 40% over 2016. It might stabilize or increase slightly this year.
After a few years under 10% unemployment started to rise sharply in the last months of 2016. The latest figures are 11.3% (November 2016). Difficult to predict, but it is safe to assume it will get considerably higher.
The official debt/GDP ratio was 32.9% in 2015 and dropped even further in 2016 (32.3% in July 2016). Predictions are that it will rise slightly in 2017.
The exchange rate of the USD to the Turkish Lira: the Turkish Lira weakened over 20% from 2.92 to 3.61. Few expect the TL to strengthen in the coming year.
- Longer term
Over the past decades Turkey has profited from the worldwide trend of production in low cost countries and transporting this production to high income countries. This period is coming to an end, with industry 4.0 around the corner. World trade is growing less fast than the world economy, an oninimous development for a country like Turkey. The main challenge in the longer run is whether Turkey is ready to become a high income country with a focus on high value added production. Nothing is impossible, definitely not in Turkey, but many steps have to be taken, in education (o.a. English) and pursuing an even more intensified approach to innovation, critical and independent thinking and mutual trust.