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Turkey Looking to the Long Term

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Turkey has a good track record of bouncing back quickly and decisively from geopolitical shocks, and its economic performance since last year’s coup has underscored its continued resilience. Although growth slowed to 2.9 percent in 2016, compared with 6.1 percent in 2015, it expanded by about 5 percent in the first quarter of this year. According to the OECD, growth has been supported by a range of government measures which have supported a recovery in both private consumption and investment. “Growth is being supported by an acceleration of goods exports, on the back of improving demand from Europe and competitiveness gains delivered by exchange rate depreciation,” notes the OECD.

This encouraging showing suggests that external growth projections for Turkey may be too conservative. The IMF, for example, has forecast growth of 2.5 percent in 2017 and 3.3 percent in 2018, which is well below the government’s projected rate of 4.4 percent this year. But, as the IMF noted in its most recent World Economic Outlook published in May, “in emerging and developing Europe, growth is projected to pick up in 2017, primarily driven by a higher growth forecast for Turkey.”

Short-Term Challenges
There are, however, clearly several challenges facing the Turkish economy over the short-term, as Moody’s noted earlier this year when it revised its outlook on the sovereign from stable to negative. “The change in the rating outlook to negative captures a combination of inter-related drivers, such as the continuing erosion of Turkey’s institutional strength, its weaker growth outlook, heightened pressures on Turkey’s public and external accounts and in consequence, the increased risk of a credit shock,” Moody’s commented.

Fitch has also cautioned about the short-term pressures on the economy. Maintaining its BBB- rating on the sovereign in July, the agency noted that the financing of a widening current account deficit would keep net external debt on an upward trend.

A Compelling Longer-Term Story
Nevertheless, Fitch also forecast economic growth of 4.3 percent between 2017 and 2019. Although this is down on the 7.1 percent recorded from 2011 to 2015, it is still higher than the median level for BB rated economies, and considerably above the growth rates likely to be posted anywhere in the Eurozone.

In spite of short-term economic and geopolitical uncertainty, the longer-term case for Turkey continues to be compelling. This is based principally on a combination of its commitment to structural reform and its favorable demographic profile. These underpin a number of the ambitious goals the government has set for itself as Turkey prepares to celebrate the centenary of the Republic in 2023.

By then, Turkey is targeting an increase in its GDP from just over $1 trillion in 2015 to about $2 trillion, an increase in GDP per capita from $14,000 to $25,000 over the same period, and a rise in exports from $201 billion to $500 billion. In support of these goals, Turkey is committed to an extensive infrastructure investment program, with the government recently announcing plans to invest $64 billion in around 3,500 projects, many of them in the transportation sector.

Turkey’s demographic profile also suggests there are bright prospects for accelerated expansion across the financial services industry, which posted encouraging growth in the first half of 2017. According to numbers published by Halkbank, total deposits in the banking system rose by 9 percent in the first half, with those at Halkbank increasing by 14.5 percent. Over the same period, total loans increased by 10.7 percent, with Halkbank posting a 14.5 percent expansion in its loan portfolio. This increase has not been accompanied by a rise in non-performing loans, which have remained stable in 2017.

With 48 percent of the population under the age of 29, according to Akbank, and with 47 million people in Turkey still either unbanked or semi-banked, there is considerable room for growth in areas such as SME financing and retail banking throughout the country. Total loans amount to just 69 percent of GDP, for example, while household debt and mortgage debt are a modest 17 percent and 6 percent of GDP respectively.