KEY CONDITIONS AND CHALLENGES
罢ü谤办颈测别’s development over the past two decades has been impressive, with real GDP growth averaging 5.4% from 2002 to 2022, more than doubling income per capita. This growth also significantly reduced poverty, halving the rate from over 20% in 2007 to below 10% in 2021. Despite the COVID-19 pandemic, 罢ü谤办颈测别’s economy grew by 1.9% in 2020 and achieved 11.4% growth in 2021, driven by government policies and strong domestic and external demand, and 5.5% in 2022.
However, these policies also heightened macroeconomic risks, including high inflation, currency depreciation, and a higher current account deficit. Since the May 2023 elections, however, the economic management has moved towards economic normalization. These policies—based on a tighter monetary policy, a relatively prudent fiscal stance, and a structural reform agenda—have already achieved important outcomes. The growth rate remained strong in 2023 (5.1%), the current account deficit has significantly narrowed, disinflation started as of June 2024 (after peaking at 75% in May 2024), risk premiums have fallen markedly (from close to 900 bps in summer 2022 to around 270 bps as of September 2024), reserve accumulation accelerated, and the rebalancing of growth has begun. Accordingly, all three major rating agencies upgraded 罢ü谤办颈测别’s sovereign risk ratings in 2024.
罢ü谤办颈测别’s normalization of macroeconomic policies continues to provide opportunities and challenges. The tightening of monetary policy coupled with decisive forward guidance of the Central Bank have boosted confidence in financial markets, increasing investors’ appetite for Turkish lira assets and lowering medium-term inflation expectations. Meanwhile, despite the tight monetary stance, disinflation will take time and fiscal policy’s support is yet to come. For sustained disinflation, the coordination of monetary and fiscal policy is critical, as is fiscal consolidation, with fiscal policy also supporting vulnerable groups throughout the stabilization period to reduce poverty and inequality.
The economic team, led by Vice President Cevdet Y?lmaz and Minister Simsek, has launched policies to address macroeconomic imbalances, aiming for sustainable growth and stability. 罢ü谤办颈测别 saw a 5.1% economic expansion in 2023, with growth expected to slow to 3.2% in 2024 and to 2.6% in 2025 before rebounding. The Medium-Term Fiscal Program emphasizes shifting growth from private consumption to investments and exports. The government must tackle high inflation, build resilience against climate and earthquake risks, ignite productivity growth, and manage external risks while leveraging opportunities through structural reforms and green transformation. Maintaining current policies is essential for long-term sustainable growth and stability.
RECENT DEVELOPMENTS
Despite substantial tightening of monetary policy, the economy expanded 5.1% in 2023 and 3.8% (YoY) in H1 2024. Private consumption continued to be the main driver of growth, and the contribution of net exports turned positive in Q1 for the first time since Q3 2022. However, growth momentum has slowed in both production and demand. The PMI, which had increased to above the 50-threshold indicating expansion in Q1, fell to a 54-month low of 44.3 by September 2024. Automobile sales declined by approximately 16% (YoY) in July.
The labor market continues to be strong. The seasonally adjusted unemployment rate fell to 8.5% in May, before rising to 8.8% in July. Labor force participation rates increased, reaching 73% for men and 37% for women—the highest level for women since January 2005. The gross wages and salaries index was 115.4% (44% in real terms) higher in Q2 2024 than in 2023, due in part to large minimum wage increases in July 2023 and January 2024.
The current account deficit, down to $45.0 billion in 2023, continues to improve, with the 12-month cumulative deficit narrowing to $19.1 billion by July 2024. Risk premiums continue to fall with the CDS premiums at approximately 250 in mid-July compared 500 in July 2023 and nearly 900 in July 2022. The government’s commitment to the economic program generated a surge in portfolio inflows, and the resulting real appreciation of the TRY incentivized firms and households to switch from FX to TRY assets. This helped the CBRT to significantly improve its reserves. By end-May, net reserves, excluding swaps, turned positive for the first time since early-2020. By mid-September, net reserves had reached $48.8 billion ($26.5 billion, excluding swaps). However, real TRY appreciation has negatively affected exports in recent months, especially lower-value products, while imports of final consumption goods remain strong.
Inflation peaked at 75.5% in May before easing to a 14-month low of 49.4% in September, entering the positive real interest rate zone, thanks to monetary policy tightening, exchange rate dynamics, and base effects. This figure is still above the Central Bank’s year-end target of 41.5% and market expectations. Inflation is particularly high in some categories making up a larger consumption share of poor households. For example, rental inflation reached over 120% in September. Improvement in inflation expectations slowed down in October. Market participants’ expectations for the year-end is 44.1%, and for the next 12 months, stood at 27.4%.
Monetary policy normalization and gradual unwinding of macroprudential regulations have helped improve bank profitability and capital adequacy. Banks have eased commercial lending, but high policy rates have driven up deposit and credit interest rates, constraining loan growth. The banking sector’s net FX position has improved, and the risk premium for external borrowing has declined, although external debt costs have increased due to global conditions. Regulatory forbearance is being phased out, which may impact the capital ratio of some banks; however, capital buffers remain adequate. Tighter credit conditions have begun to take a toll on household credit and MSMEs, with increasing credit card defaults and a gradual rise in insolvency and concordat filings, although levels remain moderate.
The annualized budget deficit eased to 4.7% of GDP in Q2 2024, after reaching 5.2% of GDP in 2023. The government has issued a new tax package to generate further revenue for the budget, including regulations to combat the informal economy. Meanwhile, public debt to GDP remains manageable, at 26.1% as of Q2 2024.
OUTLOOK
Economic growth is projected to slow in the short term, to 3.2% in 2024 and 2.6% in 2025, on the back of tighter policy and subdued global growth, before picking up at 3.8% in 2026. Disinflation started in June and is forecast to continue gradually, given tight monetary policy. The current account balance is forecast to improve further in H2 2024 and remain low in 2025, due to the rebalance in growth composition, which will rely less on domestic consumption and have greater contribution from investment and net exports. General government deficit is forecast to remain high in 2024, given the economic slowdown and earthquake recovery needs, and despite fiscal consolidation efforts.
Poverty is projected to decline more slowly in the short term, to 6.3% in 2024, despite the economic slowdown. Strong labor market performance and minimum wage hikes exceeding CPI increases are the main drivers of continued poverty reduction. However, minimum wage hikes are less likely to reach informal workers or those out of the labor force, such as the elderly or parents with no access to childcare. Moreover, relying on the minimum wage to protect the poor has other economic consequences, notably inflation fueling. Well-implemented and flexible social protection programs can mitigate the economic slowdown’s impact on poverty. Revamping the social protection system to improve targeting and coverage is warranted: in 2021, the share of public transfers to the bottom three deciles was lower than to the top three deciles.
Risks to the outlook continue downside. Inadequate growth rebalancing would challenge macroeconomic stabilization. Domestic private consumption is still robust, and there is a risk that the domestic adjustment will create external imbalances whereby recent real TRY appreciation could further hamper exports and boost non-oil imports. Mounting geopolitical tensions would also hinder exports. The lack of significant fiscal consolidation, primarily on the expenditure side, could slow the disinflation process.
Last Updated: Oct 23, 2024
