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Turkey 2014 | ECONOMY | REVIEW: ECONOMY

Turkey continues to prove itself as a long-term investment destination, despite noise in emerging market economies amid a sluggish global recovery.

GDP grew by 4.4% in 4Q2013, bringing the 2013 figure to 4%, the government's target for the year following growth of 2.2% in 2012. The result suggests Turkey has lost none of its long-term investment attractiveness, coming as it does amid concerns that US Federal Reserve tapering could impact on growth in EMs, which are typically sensitive to hot money. Obtaining a similar figure in 2014 could be tricky, however, as the CBRT took steps in January to decrease volatility in the lira by raising interest rates, an effort that has now seen the lira begin to hold its ground against the US dollar, but that could also hurt loan growth, and thus cut consumer spending, over the course of the year. The CBRT is also forecasting an inflation rate of 7.6% for end-2014, above its target of 5%. A rise in prices of 3.6% in 1Q2014, however, suggests the final number could come in higher.

On the current account front, Turkey's deficit widened to $65 billion at end-2013, higher than anticipated but not entirely unexpected as 2012's figure of $49.5 billion had been impacted by a surge in gold exports to Iran toward the end of the year. A slowing economy, backed by a weaker lira, could see the current account deficit (CAD) improve significantly over 2014, however, in exchange for lower growth overall. The foreign trade deficit came in at $99.78 billion in 2013, up almost 19% from 2012, with imports up 6.4% and exports, at $151.86 billion, down 0.4%. Net FDI decreased by 4.1% in 2013, amounting to $12.7 billion, with total capital inflows of $10.2 billion.

IN THE DETAILS

A Bloomberg survey, carried out in March 2014, suggests that the economy will grow at 2.2% this year, contrary to the opinion of the CBRT, which suggests that 4% is obtainable. However, following local elections that heralded the continuation of the status quo, and a hint that interest rates could be cut gradually when the time is right, all eyes will be squarely fixed on domestic growth over 1H2014. Analysts will also closely be monitoring inflation, which the CBRT has said it will consider before any potential rate cut. Therein lies uncertainty, however, that the Governor's forecast of 7.6% for end-year inflation is realistic, especially given that the 12-month average inflation in consumer prices increased to 7.7% and domestic producer prices rose to 6.95% following a data release in March. Either way, the CBRT is still a ways off its overall target of 5% inflation, and has made the indicator its enemy number one. “The CBRT has underlined that it would not tolerate any deterioration in price stability in the medium term," said Governor Erdem Başçı, adding that, “a tight monetary policy stance will be sustained until there is a significant improvement in the inflation outlook."

SOLVING THE CAD

Turkey's CAD came in at $65 billion in 2013—or 8% of GDP—forming a key obstacle that the economy must overcome if it is to shed its vulnerable image. The US Federal Reserve, in February 2014, classified Turkey as the most vulnerable of a group of leading EMs, following a similar report from the IMF in October of 2013. Turkey must therefore, according to analysts, increase its attractiveness to long-term investment, such as FDI, and learn to rely less on the short-term injections of hot money it has become used to. But the CBRT isn't sitting idly by; “one of the CBRT's main policy objectives has been to mitigate the sensitivity of the domestic economy to the volatility of cross-border capital flows," said Governor Başçı, adding that its tool belt included, “the interest rate corridor, the reserve option mechanism developed by the CBRT, and other lira and FX liquidity management tools."

Recently, Turkey has financed its CAD, to some extent, through the foreign purchase of stocks and bonds, but with a fall in interest over 4Q2013 and 1Q2014, Turkish banks picked up a large chunk of the slack through foreign borrowing. Economists now predict that slowed growth could ease the economy's CAD woes in 2014, with 6% of GDP a realistic figure. However, low global risk appetite for EMs could impact the country's ability to attract more financial inflows in the medium term—FDI was in at $12.6 billion in 2013, down 4.1% on 2012—underlining the need for the country to boost value-added exports and come to rely less on imports. To that end, the banking regulator introduced, in early 2014, limitations on monthly installment payments in certain product groups in order to stem the rise of credit card usage, and thus reduce the amount spent on imported goods.

TRADE

Turkey's trade deficit reached $99.78 billion in 2013, a full 18.7% higher than in 2012. The year concluded on a negative note, with exports dropping 4.9% in December YoY to $13.22 billion, while imports were on the up, reaching $23.13 billion, according to TurkStat. That said, things were looking better in February according to official data, with the deficit narrowing to $5.1 billion. This brought the rolling trade deficit to $97.5 billion, down $1.9 billion from January. Delving into the details, the EU remained Turkey's largest export destination in 2013, at $5.27 billion, or 39.9% of total exports. It was Iraq, however, that topped Turkey's list of export destinations, with $1.24 billion, followed by Germany at $1.16 billion, and the UK on $0.71 billion. The country's favorite import sources for the same year were Germany, with $2.4 billion, Russia, at $2.4 billion, China, on $2.14 billion, and Italy, with $1.12 billion. The country has concluded 30 free trade agreements (FTAs) in total, 11 of which have been cancelled as Central and Eastern European countries have joined the EU. FTAs with Ghana, Moldova, and Malaysia are also expected to be signed in 2014, while negotiations are set to commence with Mexico, Japan, and Singapore and possibly the US, Canada, and India. “When all these FTAs are completed, Turkish exporters will be able to access markets covering 47% of global GDP and 45% of global trade," commented Nihat Zeybekci, Turkey's Minister of Economy, adding that by end-2014, “exports and imports are expected to be $166.5 billion and $262 billion, respectively."

FDI

Economy Ministry data suggests that FDI dropped by 4.1% to $12.6 billion in 2013, with capital inflows worth $10.1 billion and the energy sector the largest beneficiary of foreign capital at $2.55 billion. Turkey's close economic ties to the EU continued in this respect, with the bloc representing 52% of the capital that flowed into the country over the year. A total of 2,960 foreign-funded new companies set up shop in Turkey in 2013, down from 3,703 in 2012, bringing the grand total of firms funded by foreign capital to 37,000. A whopping 22,000 of those are based in Istanbul, the country's commercial heart. Ankara comes second with 4,046, while Antalya, a resort town on Turkey's Mediterranean coast, boasts 2,279, mainly in the hospitality segment. According to the official data, German-funded firms are the most numerous, at 5,631, followed by UK-funded operations, at 2,635.

The country's “young labor force… rapid capital accumulation, and improvement in productivity" offer “comparatively high growth rates for… foreign firms," according to CBRT Governor Başçı, with the government looking to back the private sector's ability to create employment and growth by “supporting the proper functioning of markets and the competition environment, ensuring the protection of intellectual property rights and boosting the attractive and predictable business and investment climate," through the Medium-Term Program (MTP), added Başçı. The Turkish growth story is far from interrupted, with continued activity on the markets suggesting investors are confident the economy can continue leading the EMs. The impact of consumer spending over the course of 2014 will dictate whether Turkey can maintain a growth rate of 4%. But, should the locals keep their wallets shut, the economy could gain the time it needs to close the CAD and ease inflationary pressure. With the country embarking on megaprojects, such as a third bridge across the Bosphorus and a third airport to serve Istanbul's swelling ambition, the government will not want to let its foot slip too far off the accelerator as it moves toward its 2023 vision, a patchwork of grand goals that would see Turkey become one of the world's top-10 economies by the 100th anniversary of the founding of the republic.