Turkey is one of the largest upper middle-income partners of the World Bank Group (WBG). With a Gross Domestic Product (GDP) of $ 799.54 billion, Turkey is the 17th largest economy in the world. In less than a decade, per capita income in the country has nearly tripled and now exceeds $10, 500. Turkey is a member of the OECD and the G20, and an increasingly important donor to bilateral Official Development Assistance (ODA).
Turkey’s rising prosperity has been shared. Between 2002 and 2012, the consumption of the bottom 40 percent increased at around the same rate as the national average. Over the same period, extreme poverty fell from 13 to 4.5 percent and moderate poverty fell from 44 to 21 percent, while access to health, education, and municipal services vastly improved for the less well-off. Since the global financial crisis, Turkey has created some 6.3 million jobs, although increases in the labor force, including through a rise in the participation of women, has kept unemployment at around 10 percent. Turkey’s achievements and future potential have been a source of inspiration for other emerging markets, and the World Bank has completed a report on Turkey’s Transitions describing the country’s experiences in order to share them with interested developing countries.
The EU accession process has been a significant anchor for reforms in Turkey, but progress has slowed in recent years. The EU is Turkey’s largest economic partner, accounting for around 40 percent of Turkish trade. Turkey has benefited significantly from deepening integration with the EU through the growing sophistication of both exports and imports and access to financing. Turkey became a candidate for full EU membership at the Helsinki summit in 1999. Accession negotiations began in October 2005, but progress has slowed in recent years in the face of a number of political obstacles (including relations with Cyprus). Both sides are making efforts to regain momentum, with a focus on economic cooperation, in particular the modernization of the Customs Union and energy relations.
Since 2012, however, growth has moderated. In 2013–14 and 2015, election-related uncertainties, geopolitical developments, and concerns over the Government’s handling of corruption allegations dampened confidence and weakened private demand. After growing 4.2 percent in 2013, the economy slowed to 2.9 percent in 2014. Moreover, Turkey has been vulnerable to changes in investor sentiment and, together with other emerging markets, has experienced significant currency and financial market volatility since mid-2013. Moderate growth and a weaker lira narrowed the current account deficit (CAD) to 5.7 percent of GDP in 2014 from close to 10 percent in 2011.
Growth is estimated to have increased to 4.2 percent in 2015, much higher than expected. Despite depressed consumer confidence and intensified election uncertainty, private consumption became the main driver of growth, thanks to real wage growth, large decline in oil prices, the wealth effect from currency depreciation, and the influx of refugees largely from Syria. Government spending continued to support growth, while private investment remained depressed amid a weakening business climate. Exports slowed sharply due to slower demand from EU, economic crisis in Russia, and geopolitical developments in MENA. However, real exchange rate depreciation triggered a shift from foreign goods to domestic goods, which led to a decline in imports and a positive contribution of net exports to growth in 2015.
External adjustment continued thanks to lower energy prices. The gold-adjusted current account deficit narrowed by 0.3 pps to 5.0 percent of GDP in 2015, thanks to the large fall in energy prices. However, the improvement was much smaller than the savings from lower energy imports because the core current account deficit actually widened. This deterioration in fundamentals highlights difficulties in strengthening exports, and that external adjustment is driven by cyclical factors instead of structural reforms. On the financing side, inflows to Turkey slowed sharply, as short-term inflows dried-up due to domestic political uncertainty and a deterioration in the global risk appetite, leading to a decline in Central Bank reserve assets.
Currency depreciation stoked inflation in 2015. FX pass-through on prices for transport, clothing, furnishings, and recreation brought 12-month inflation up to 9.6 percent by January 2016, significantly above the Central Bank`s target band of 3-7 percent.
November 1 election created much-needed clarity. The Justice and Development Party (AK Party) regained the majority in the November 1 parliamentary elections, which mostly resolved political uncertainty. However, attempts to bolster AK Party’s support in parliament and push for constitutional changes could prove a major distraction in the near future.
A recovery in imports is likely to slow growth to 3.5 percent in 2016 despite sustained domestic demand momentum. We expect private consumption to continue to be the main driver of growth in 2016, thanks to the 30 percent rise in the minimum wage introduced in January. Public spending is expected to contribute positively, albeit at a slower rate. Continued demand pressures are likely to make disinflation a slow process, and inflation is projected to be around 8.5 percent by end-2016. Lira depreciation has strained balance sheets and raised the debt service burdens of the corporate sector, which has large foreign exchange exposures. These weigh heavily on private investment, along with a widespread perception of deteriorating institutional quality and business climate. On the external side, firming activity in the EU is helping exports, but net exports should turn negative as imports recover. Russian sanctions and disappointing global growth are likely to reduce export growth in 2016. Moreover, low oil prices are expected to stabilize the current account deficit at around 4.6 percent of GDP in 2016.
To realize its underlying growth potential, Turkey needs to accelerate structural reforms and improve trust in its institutions. Turkey’s main assets include a young, dynamic population, a large domestic market, and a strategic location, combined with strong infrastructure and much improved public services. However, domestic and foreign investors remain deterred by the unpredictability and lack of transparency in the business climate and a lack of trust in key institutions. An increase in business investment and innovation as well as in education and skills is needed to boost productivity growth and create enough high-productivity jobs to accommodate Turkey’s rapidly growing labor force. The recently unveiled action plans for the 25 priority transformation projects of the 10th National Development Plan provide for an ambitious reform agenda, but the gap between policy announcements and implementation has widened in recent years and needs to be closed to regain investor confidence.
Last Updated: Apr 07, 2016