Ankara, July 1, 2015 —Political uncertainty continued after the parliamentary elections, creating some downside risks to the 2015 growth forecast of 3 percent according to the World Bank’s Turkey Regular Economic Brief [i] (July) - issued today in Ankara. Public spending offset weaker private demand to keep growth solid in the first quarter. Despite declining food prices, lira depreciation and increases in oil prices pushed inflation higher.
The Brief notes that growth remained resilient in Q1 thanks to public spending and lower imports. Likewise job creation recovered in the first quarter driven by services and industry. The stronger than expected growth in Q1 is balanced by the uncertain political environment in the aftermath of the June elections.
Turkey`s current account deficit has narrowed since January, thanks to gold exports. However, the gold adjusted deficit, a more accurate measure of external demand, deteriorated due to persistent weakness in Turkey’s trading partners.
The Brief indicates that inflation is likely peaking. Exchange rate depreciation amplified the impact of the oil price rebound since January and outweighed the relief from lower May food prices. Looking forward, favorable weather and a better harvest will further help bring food inflation down.
According to the Brief, short-term financial inflows significantly slowed due to election uncertainty, while long-term inflows remained strong. Particularly, as the risk premium increased, nonresidents sold portfolio assets. However, net errors and omissions showed an inflow of $7.8 billion. This, together with a drawdown of foreign exchange reserves by $5.7 billion financed most of the current account deficit.
The expected FED lift-off will lower the returns on carry trade and is likely to put emerging market currencies under pressure. The Central Bank will thus have limited room for accommodative monetary policy whilst maintaining financial stability.
The Brief confirms that the growth forecast will remain at 3 percent for 2015, with the current account deficit falling to 4.6 percent of GDP. Under the assumption that further pressure on the exchange rate can be contained, 12-month inflation is likely to decline to 7 percent by December 2015.The forecast for 2016 and 2017 is downgraded to 3.5 percent for both years, from 3.9 and 3.7 percent respectively, against the backdrop of an uncertain domestic political outlook and a gradually tightening global financial environment.
“Restoring investor confidence is key to growth over the short to medium term. There is an urgent need for a stable, inclusive government and the return to implementation of the structural reform agenda to restore investor confidence” indicates the Brief.
Against this background, the World Bank in FY15 has supported projects to enhance Turkey’s competitiveness including a Development Policy Loan supporting key reforms in capital and labor markets; additional financing to BOTAŞ for the completion of the Tuz Gölü Gas Storage Facility; and further financial support for Turkish SMEs focused on innovative instruments such as Islamic financing and factoring.
The World Bank’s work in Turkey is based on a joint Country Partnership Strategy (CPS) for the period 2012-2016. The CPS aims to support Turkey’s transition to high income with financing of up to US$ 6.45 billion during the five year period, as well as with policy analysis and advisory services. Key objectives include enhanced competitiveness and employment, improved equity and public services and deepened sustainable development. The World Bank’s partnership with Turkey is evolving to include the sharing of knowledge and experience with a wider international audience.
[i] Turkey Regular Economic Brief is a two page brief assessing current developments in the Turkish macro economy and provides World Bank quarterly forecasts on key macroeconomic variables, linking these to underlying trends in structural reforms.