- The ongoing acceleration in credit growth will help domestic demand rebound this year before further accelerating in 2014, leading real GDP growth to accelerate to 3-4.5% in 2013 and 2014 from 2.2% in 2012.
- After narrowing from 10% of GDP in 2011 to 6% in 2012, thanks mainly to very strong growth in exports (partly driven by gold exports), the current account deficit will likely widen to 7-8% of GDP during 2013-2014, with growth in domestic spending set to rebound and growth in exports volume likely to normalize.
- With slower output growth, smaller proceeds from the tax amnesty and overruns in wage and investment outlays, the general government deficit widened from 0.5% of GDP in 2011 to 1.4% in 2012. With some pre-election spending likely ahead of three elections in 2014, spending looks set to increase substantially this year and next, widening the general government deficit to 2.2% of GDP in 2013 and further to 2.4% of GDP in 2014.
- Following the sovereign rating upgrade to investment grade in May, global risk appetite towards Turkish assets will likely remain strong. As a result, capital inflows to Turkey look likely to remain sufficiently large such that appreciation pressures on the lira should persist in 2013. This should prompt the central bank to cut its key policy rate further in an attempt to contain appreciation pressures together with further macroprudential tightening to sterilize any excess FX liquidity from the market.
Turkey Publications
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Turmoil Sharpens Market Vulnerabilities
June 18, 2013Concerns about the possible winding down of monetary accommodation in the U.S. had already brought the lira and Turkish asset prices under downward pressures. Market concerns were reinforced further by heightened political uncertainty triggered by ongoing anti-government protests. Given Turkey’s large external financing needs, odds for abrupt lira depreciation will remain high unless confidence is restored soon.
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Current Account Deficit Narrows, Risks Remain
March 07, 2013External financing needs look set to increase with the current account shortfall likely to widen through 2014. Heavy reliance on short-term capital inflows looks likely to continue. This will leave the lira vulnerable to shifts in market sentiment. An abrupt lira depreciation would hurt balance sheets of companies the most as they run large unhedged net open foreign exchange positions.
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Trip Notes
November 30, 2012Output growth is likely to accelerate in 2013 after slowing significantly this year. Slower and more balanced growth has helped reduce external imbalances. Headline inflation looks set to remain above the 5% target through 2014. Even so, the central bank is likely to ease further to discourage short-term capital inflows following Turkey’s recent upgrade to investment grade.
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Output Growth Set to Slow, Interest Rate Cuts Likely
September 14, 2012Real GDP growth has slowed markedly thus far this year. Leading indicators point to a further slowdown during the remainder of the year. With capital inflows set to strengthen, appreciation pressures look set to intensify. Slowing output growth and a strong lira would likely prompt the central bank to implement more aggressive easing.
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Interest Rates Will Need to Remain High
June 25, 2012Since late 2010, the central bank has sought to tighten monetary conditions to slow inflation and narrow the current account deficit while leaving its key policy interest rate unchanged. A simpler strategy may be needed, with unambiguously higher interest rates, if global financial pressures intensify.
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Capital Inflows Recover
April 13, 2012Increases in foreign exchange reserves since January indicate that capital inflows have recovered strongly from depressed levels after August 2011. Whether increased capital inflows are sufficient to cover the current account deficit will depend importantly on whether the central bank sustains the higher money markets interest rates it has brought about since late last year to stem the lira’s slide.
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Reduced Capital Inflows Lag The Current Account Deficit
February 21, 2012The current account deficit looks set to remain larger than capital inflows this year, potentially leading to a further worrisome decline in foreign exchange reserves. This would pose an increasing risk to financial stability in the absence of moves to tighten fiscal and monetary policies.
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