Turkey’s economy on the up, but deep-rooted problems remain

Short-term tax measures and government credit guarantees stimulate consumer spending

Turkish president Recep Tayyip Erdogan said in December: I am saying I am against high interest rates, and I will continue to say it. Inflation cannot fall in a country with high interest rates.” Photograph: Yasin Bulbul/Anadolu Agency/Getty Images

Turkish president Recep Tayyip Erdogan said in December: I am saying I am against high interest rates, and I will continue to say it. Inflation cannot fall in a country with high interest rates.” Photograph: Yasin Bulbul/Anadolu Agency/Getty Images

 

Terror attacks, political tumult and fraying relations with the West have seen Turkey’s economy take a beating in recent years.

However, with the visible effects of the botched July 2016 coup now fading, and the spate of terrorist attacks that plagued the country in 2016 apparently at an end, an economic revival of sorts has quickly followed.

Fuelled by the Turkish lira’s fall against major currencies, exports in 2017 reached a record €120 billion. Turkish auto makers rolled out more than 1.54 million Renault, Peugeot, Toyota and other car models in 2017, more than three-quarters of which are to be exported to European Union countries. These and other factors have contributed to Turkey ranking as the fastest-growing G20 economy for the third quarter of 2017, at 11.1 per cent, according to the Turkish Statistical Institute.

“They are currently being helped by a cheap lira and strong growth in Europe, ” says Tim Ash of BlueBay Asset Management, a global investment group. In the wake of Turkey’s political and security unrest, short-term taxation measures and government credit guarantees have stimulated consumer spending – a cornerstone of economic activity over the last decade. Major public projects such as the €10 billion Istanbul Grand Airport, and the Eurasia Tunnel, a vehicular tunnel linking the European and Asian sides of the city under the Bosphorus Strait, have employed tens of thousands of people during their respective construction phases.

Ahead of schedule

Work on the new airport, which is set to be unveiled as the world’s largest, is six months ahead of schedule and is expected to partially open in the coming weeks, according to Turkey’s transportation minister. Other multi-billion-euro projects to have opened in recent years include a third bridge over the Bosphorus Strait, the expansion of Istanbul’s metro system and the 2.6-kilometre-long Osman Gazi bridge in the gulf of Izmit, named after the fourteenth century founder of the Ottoman dynasty.

The grandeur of these and other megaprojects has helped the government fuel, and tap into, a surge in nationalist feeling that’s often anti-Western in flavour, but which is simultaneously growing consumer confidence and spending rattled by the events of 2015 and 2016, when hundreds of civilians were killed while attending public events in Istanbul, Ankara and elsewhere.

At the recently-opened Uskudar metro station in eastern Istanbul, dozens of commuters cram into the train’s front car, all with smartphones at the ready. They are about to embark on a trip on Turkey’s first ever driverless subway system. At full capacity from June, it will serve 700,000 passengers along a 20km route. For many in this conservative district, this thoroughly modern experience – the kind of technology previously only available in the world’s most advanced countries – is a source of great national pride.

Yet even here, the spectre of suspicion that’s increasingly coloured life since the arrest or firing of more than a 100,000 alleged government opponents over the past 18 months – including Turkish and foreign journalists - was on show: Despite presenting valid press credentials, The Irish Times was prevented from taking photos of the new metro train and was promptly escorted from the underground network. The fear-filled legacy of the failed coup, combined with a nationalist swing and growing criticism of the West by Turkey’s top politicians, have all contributed to an increasingly uneasy atmosphere.

New infrastructure projects

There’s little doubt that for a city the size of Istanbul, which every year adds a number of residents equal to the population of Belfast, bringing on track major new infrastructure projects is a minimum requirement. And while the city gears up for the opening of the new airport, not all signs are positive. Over the past two years, seven major Western airlines have stopped flying into Istanbul due to declining demand in European and North American markets. Outside of Istanbul, the lauded building booms that has fuelled growth in dozens of the so-called ‘Anatolian tiger’ cities has, in many cases, simply allowed residents and businesses move for the first time into properties with running water and electricity.

“As fiscal stimulus is scheduled to be withdrawn in 2018, against the backdrop of continuing regional and domestic uncertainties, strengthening business and household sentiment will be essential for maintaining growth momentum,” reported an OECD document released in November.

Unemployment is expected to creep up to 11.3 per cent by 2019 as the country struggles to keep pace with a labour force that has grown from 19 million people in 1990 to 31 million this year. Analysts believe that Turkey’s large volume of imports mean its current account deficit, at 4-5 per cent of GDP, remains large and is set to widen. Financing €142 billion of debt is another major worry point.

Inflation

The country’s ongoing struggle with inflation - climbing to a 14-year peak in November – has been a longstanding source of tension between the central bank, which wants to raise interest rates, and Turkey’s political leaders. “I see efforts to justify pressure to increase interest rates through short-term economic manipulations as futile,” Turkey’s increasingly autocratic president Recep Tayyip Erdogan asserted on December 12th. “I am saying I am against high interest rates, and I will continue to say it. Inflation cannot fall in a country with high interest rates.” All the while, polls regularly cite rising prices as the number one issue worrying Turks.

Some observers say unchecked political interference and the erosion of independent state institutions are major threats to continued growth. Experts such as Ash of BlueBay Asset Management suggest that the figures purporting high levels of growth may mask underlying problems that are likely to continue to trouble the Turkish economy. “(Robust growth) looks unsustainable, given rising inflation (13 per cent, more than twice the central bank target) and a growing current account deficit,” he says.

“The danger is a balance of payments crisis, a big FX correction, higher policy rates in response and a hard landing with lower growth.”

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