VIRTUOUS CYCLE

Turkey 2014 | DIPLOMACY & POLITICS | YEAR IN REVIEW

The Turkish economy grew 4% over 2013, after a better-than-expected growth rate of 4.4% in the final quarter.

Prime Minister Recep Tayyip Erdoğan has largely spearheaded Turkish growth over recent years, and a sign of the economy's increasing clout is the development of a series of megaprojects in Istanbul, the country's commercial core. Projects include a third bridge across the Bosphorus, currently under construction, a third airport to cost some $30 billion, also in the early phases of development, and the more elaborate Canal Istanbul project, which would relieve maritime congestion on the Bosphorus. The country also celebrated the opening of the Marmaray in 2013, a tunnel under the Bosphorus that provides a metro link between Europe and Asia.

But growth has largely been fuelled by increasing domestic consumption in recent years, a trend that hasn't helped in the economy's struggle with a widening current account deficit (CAD), which reached $65 billion at end-2013. To curb loan growth, installment limits came into effect in early 2014 to rein in Turkey's growing private debt, with credit card debt at TL240 billion as of October 2013. A CBRT interest rate hike in January, in order to combat a lira devaluation that has seen its value slip with its major trading partners, will also dampen consumption and has led market analysts to suggest the government could fall short of its 4% growth target for 2014. When deciding to hit the button on growth, however, via a re-think on interest rates, the CBRT will have one eye on inflation, which stood at over 7% at end-2013, above the target of 5%. Locals are certainly likely to witness growing food prices over coming months, due to drought conditions that saw rainfall drop by 31.4% on average over 4Q2013, and no major improvement in 1Q2014. According to TurkStat figures, the consumer price index (CPI) increased by 1.72%, the highest for 26 months, in January 2014 as a result of weather conditions and a weakened lira.

Turkey also posted a trade deficit in 2013 of $99.78 billion, up 19.7% on 2012. Imports for the year were up 6.4%, while exports were down a touch at 0.4%. However, early data from 1Q2014 indicate that the CAD is likely to fall well under the $60 billion mark. Net FDI also dropped by 4.1% in 2013, coming in at $12.7 billion as 2,960 foreign-funded companies opened their doors in the country, down from 3,703 in 2012.

Turkish industrial production (IP) grew at 4.9% in February 2014, still strong despite estimates that automotive production, the industrial sector's largest sub-segment, could fall in 2014 after growing 5% in 2013 as a result of dampened consumer confidence and tighter credit conditions. However, a weak lira could prove positive for exporters. Almost 830,000 automobiles were exported in 2013, drawing in revenue of $21.5 billion, making the auto sector one of the country's largest export earners.

Elsewhere, Turkey remained popular with foreign tourists over 2013, with the incoming visitors number rising by 9.94% over the year, reaching 34.91 million. This makes Turkey the sixth most-visited country in the world, with its popularity as a destination underlined when Istanbul placed first in a poll of top cities carried out by TripAdvisor in April in 2014.

Other developments to look out for over 2014 include education reform, while further work is being done to improve national healthcare and encourage more private sector investment, especially in hospitals.

The country's constructors, long a driver of growth, will also be busy over 2014 on projects already underway, with growth expected to come in at over 5% for the year. Urban transformation projects have kept builders occupied in Istanbul, especially, in recent years, while efforts to develop the infrastructure needed to turn the city into a financial hub will continue to fuel growth, especially in the city's Ataşehir neighborhood.

Despite Federal US Reserve tapering concerns, which have worried investors in EMs vulnerable to inflows of hot money, investors have displayed a long-term commitment to Turkey in recent months, much an endorsement of the country's growth credentials and belief in the continuation of a stable government. Turkey's next test will be its presidential elections, due to be held in August 2014, while the general election for the national parliament is expected to occur in 1H2015.