EBRD economist: Turkish economy rebalancing


The Turkish economy is showing signs of rebalancing, but needs more structural reforms to move up the value chain, the chief economist of the European Bank of Development and Reconstruction (EBRD) said on Thursday. 

“The current account deficit had reached 6.5% of GDP, and inflation was in excess of 25%. The policy tightening that was subsequently introduced, in particular the interest rate hikes by the Central Bank, helped address these imbalances, and we now see inflation at 8.6% and the current account in surplus. In this sense, there has been a rebalancing.” Beata Javorcik told Anadolu Agency.

Noting that this could be a cyclical rather than a structural rebalancing, Javocik said: “These imbalances could quickly reappear if the authorities tried to rely too heavily on the credit cycle to boost growth, and this is why some have concerns about the authorities’ growth ambitions for next year.”

She stressed that Turkey was in need of structural reforms to help foster a true rebalancing of its economy away from dependence on domestic consumption-driven growth towards innovative activities that would help move it up the value chain.

With the EBRD currently expecting Turkey’s GDP to grow 2.5% next year, she said that many believed the country’s New Economic Program — released last September and suggesting a growth target of 0.5% this year, and 5% for the next three — is “a little ambitious”, particularly alongside the program’s forecast of low inflation and a small current account deficit

Underlining the importance of geopolitical issues for the Turkish economy, she said: “An improvement in the geopolitical outlook helps reduce the country risk, and supports the currency, which makes the country more attractive to investors, supporting the economy.” 

Inflation outlook

Javorcik said that the Central Bank of Turkey’s (CBRT) forecast of 12% inflation at year-end 2019 appeared fairly credible, as the base effects that have been helping inflation fall over the past few months.

“As regards to next year, our concern would be whether the Central Bank’s forecast of 8% inflation can be met if the authorities push for achieving a 5% growth rate.

“Achieving this sort of growth rate without triggering inflation would require productivity increases and it is not clear whether these can be achieved in the short term,” she said, adding that the capacity to do so would largely depend on whether the Central Bank would be able to raise rates in response to inflationary pressures next year.  

Turkey benefits from advanced economies’ monetary policies

Asked about global monetary policies, Javorcik said Turkey has benefitted from the increased appetite for emerging market assets arising due to the trend in advanced economies towards more accommodative monetary policy.

“It has helped reduce the country’s risk premium and helped stabilize the lira. This in turn has allowed policy rates to be reduced to a greater extent than would otherwise have been the case. And of course, this has contributed to the pick-up in economic activity that we have seen in recent months,” she said. 

Risks and opportunities

Praising the Turkish economy’s strong fundamentals she said the country had “huge potential” with its strategic location, “large and well-diversified economy”, strong private sector and relatively low government debt.

She warned about the risks as well, saying: “When it comes to risks, geopolitical issues are always on top of the list. The threat of sanctions still looms large, in relation to Syria or Halkbank or the S400s. And as discussed, the impact of geopolitical risk on investor sentiment can be significant.”
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