Economic Activity in Turkey Slowing Down as Political Uncertainty Continues, Says World Bank

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The FINANCIAL — Despite the expected slowdown in Turkey in the second half of the year, the faster GDP growth in the second quarter leads to revising up growth forecast to 3.2 percent for 2015 according to the World Bank’s Turkey Regular Economic Brief (October) – issued today in Ankara. Seasonally adjusted GDP grew by 1.3 percent quarter-on-quarter in the second quarter. Private and public consumption continued to lose momentum as expected but, private investment unexpectedly surged and became the main driver of growth- an indication that the private sector front-loaded investment spending before the June election or realized previously postponed investment, anticipating elimination of uncertainties after the election.

The Brief notes that the hoped-for external adjustment fueled by a weaker lira and significantly lower oil prices has not materialized. Despite a significantly lower energy deficit, Turkey`s current account deficit widened to $45 billion in the 12 months through July 2015 (gold adjusted), compared to $42.6 billion in 2014. The deterioration in the deficit is mainly due to weaknesses in trading partners, particularly slow growth in the EU, difficulties in MENA and Russia, and a fall in tourism revenues over the summer of 2015.

Domestic political concerns and global financial market jitters dried up short-term inflows. Although the quality of finance improved thanks to lengthening maturity, net inflows fell short of financing the current account deficit in the first seven months of the year.

The Brief indicates that Inflation is likely to remain above target in 2015 around 7.5 percent. Food prices started to rise rapidly again, pushing food inflation momentum up to 14.7 percent in September. Renewed currency depreciation brought core inflation above 8 percent and its momentum above 10.5 percent. Particularly, a sharp increase in automobile prices due to depreciation added significantly to inflation in September. As a result, 12-month inflation climbed to 7.9 percent in September.

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According to the Brief, Economic activity is expected to decelerate in the second half of 2015. Credit growth momentum fell below the Central Bank`s reference rate of 15 percent by mid-September. In addition, continuing political uncertainty and tensions in Turkey’s south-east make it difficult for the private sector to sustain the investment spending witnessed in the second quarter. Businesses are likely to cut investment spending from the second quarter and postpone investment decisions until a new stable political equilibrium is reached. External adjustment should continue, as lower oil prices will likely bring the current account deficit down by another $5 billion in the remainder of the year.

The Brief confirms that Turkey`s current account deficit remains high and unlikely to fall below 5.5 percent without significant structural reforms, given the current external environment. Meanwhile, net financial inflows to Turkey dropped since May 2013, and normalization of global monetary policies will make the competition for foreign funds fiercer among developing countries with higher costs. “There is an urgent need for political stability and to return to implementing the structural reform agenda to restore investor confidence, address vulnerabilities and lift growth” indicates the Brief.  

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.

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