World Bank estimates Turkey’s growth to accelerate to 4.2 percent in 2015 despite uncertainties
The World Bank has said despite election uncertainty, Turkey’s economy posted strong growth in the third quarter of 2015, and with the much stronger outcome, growth in Turkey is estimated to have accelerated to 4.2 percent in 2015 as a whole, in its regular economic brief.
“Despite depressed consumer confidence and increased election uncertainty after the inconclusive June  election, private consumption surprisingly accelerated. Public spending also continued to support growth… We expect private consumption to continue to be the main driver of growth, thanks to the 30 percent rise in the minimum wage. However, the lagged effect of currency depreciation and elevated inflation will be restraining private consumption growth to the rates observed in 2015. Public spending is expected to contribute positively, albeit at a slower rate. Private investment should somewhat recover and contribute moderately to growth in 2016. Firming activity in the EU is helping exports, but net exports should turn negative as imports recover. Low oil prices are helping to stabilize the current account deficit at around 4.6 percent of GDP,” said the World Bank.
The brief also confirmed that Turkey’s economy continues to face headwinds on several fronts, contributing to a cautious medium-term outlook.
“[Turkish] Lira depreciation has strained balance sheets and raised the debt service burdens of the corporate sector, which has large foreign exchange exposures. These, along with existing weaknesses in the investment climate, impinge on private investment and growth. In addition, Russian sanctions and disappointing global growth are likely to partially limit export growth in 2016. At the same time, the continuing need for large capital inflows is a concern, amid difficult global financing conditions, especially since the Central Bank’s net reserves are modest,” warned the World Bank.
Medium-term growth prospects depend on the implementation of structural reforms, according to the brief.
Reform agenda to be ‘crucial’
The new government has announced its Economic Reform Agenda and the updated 2016-2018 Medium Term Program.
“The new government is well positioned to proceed with the implementation of its structural reform program in order to increase growth. Robust and timely implementation of the reform commitments, particularly starting from those under the 64th Government 2016 Action Plan, will be critical,” indicated the brief.
According to the brief, the simplification of the monetary policy framework is pending despite the United States Fed’s rates hike decision. The Fed raised interest rates in December 2015 for the first time in nearly a decade, ending the near-zero borrowing costs in the U.S. According to the road map, the Central Bank will narrow the width of its interest rate corridor and make it more symmetric around the one-week repo rate.
“However, it remains to be seen whether the simplification steps will be enough to maintain price and financial stability at a time when upside risks for already-elevated inflation coincide with weaker capital inflows to developing countries and a gradual rise in global interest rates,” said the brief.