Hong Kong Export Credit Insurance Corporation | 31 Dec 2014

Turkey: Sacrificing Higher Growth for Lower Deficit

Highlights

Political	Recep Tayyip Erdogan, who has dominated Turkish politics as prime minister since 2003, has become the country’s first directly elected president He has vowed to move Turkey away from its parliamentary system toward a form of government with a more powerful president Prolonged turmoil in neighboring Syria and Iraq represent risk to Turkey’s stability
Economic	Economic growth has been moderating to between 3-4% in recent years, amid high inflation and geopolitical tensions Large current account deficit and its reliance on short-term financing leave the economy vulnerable to capital flows

Country Overview

Turkey, with a population of around 75 million, is situated at the junction of Asia and Europe. Turkey began to open up the economy in the 1980s, expanding production in the automotive, construction, and electronics industries beyond the traditional textiles and clothing sectors. Over the past decade, GDP per capita has nearly doubled and now exceeds US$ 10,000. Although growth has been promising, Turkey's relatively high current account deficit and its reliance on short-term financing leave the economy vulnerable to capital flows. On-going turmoil in neighboring Syria and Iraq, especially the rapid rise of the extreme jihadi group Islamic State (IS), also represents risk to the country’s stability.

Key Information
Capital	Ankara
Population	75.4 million
Area	783,562 sq km
Currency	Turkish lira
Official language	Turkish
Form of state	Republic

 

Major Merchandise Exports (% of total, 2013)	Major Merchandise Imports (% of total, 2013)
Textiles & clothing (18.1%)	Fuel (14.2%)
Transport equipment (12.0%)	Chemicals (13.3%)
Iron & steel (11.5%)	Machinery (9.3%)
Top three export countries (% of total, 2013)	Top three import countries (% of total, 2013)
Germany (8.8%)	Russia (10.0%)
Iraq (7.4%)	China (9.8%)
UK (5.6%)	Germany (9.6%)

Source: Economist Intelligence Unit (www.eiu.com)

Political Trend

In August 2014, Erdogan became the country's first directly elected president, by winning about 52% of the votes in the first round.

While his supporters say he has improved Turkey's economy and given a political voice to the country's conservatives, his critics accuse him of having Islamist leanings and an autocratic style. Externally, Turkey began accession membership talks with the European Union in 2005. However, progress has so far been limited amid opposition from countries like Germany, fearing that cultural differences will make it difficult to integrate.

Economic Trend

Economic Indicators	2011	2012	2013	2014^	2015^
Nominal GDP (USD bn)	774.6	789.1	820.1	796.6	857.6
Real GDP growth (%)	8.8	2.1	4.0	3.0	4.0
GDP per capita (USD)	10,470	10,560*	10,880*	10,480	11,180
Inflation (%)	6.5	8.9	7.5	8.9	7.4
Budget balance (% of GDP)	-1.4	-2.1	-1.2	-2.6	-2.7
Current account balance (% of GDP)	-9.7	-6.1	-7.9	-5.8	-6.0
External debt/GDP (%)	39.4	42.8	47.6	48.0	44.5

* Estimates ^ Forecast
Source: Economist Intelligence Unit (www.eiu.com)

Following a strong rebound in in the aftermath of the global financial crisis, the Turkish economy has been growing at a more moderate pace in recent years. While private consumption remained the major growth engine, high inflation and sluggish wage and employment growth have constrained household spending. In the second quarter of 2014, real GDP growth slowed to 2.1% year-on-year, in the wake of tightening fiscal and monetary conditions. It is expected growth would pick up next year, supported by stronger private consumption and investment.

The country’s chronic current account deficit reflects structural issues related to its heavy dependence on imported energy – almost all oil and gas were imported. Meanwhile, Turkey’s industry imports intermediate goods to produce final goods. The country’s current account deficit could only be narrowed at the expense of higher growth, if a significant change in its trade composition is not to happen. The Turkish government has introduced various measures to address the issue. However, the plan will not have an impact on Turkey’s energy dependency in the short term.

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