Strong growth, but Turkey's economy struggles, too
By Lorraine Mallinder
European Voice
17.07.2008 / 00:00 CET
Despite a more stable economy, financial worries are lurking around the Bosphorus.
The Turkish economy is suffering a severe dip in confidence, partly attributable to the gloomy global outlook, but mainly a result of domestic political uncertainty. The country’s stock market has shed more than a third of its value this year alone, its current account and trade deficits are on the rise, and the lira is declining against other currencies.
Yet growth figures have remained strong, accelerating from a year-on-year average of 3.4% in the second half of 2007 to 6.6% in the first quarter of 2008, according to the government’s statistics institute. Despite present political troubles, the economy is still basking in the glow of record foreign direct investment of $22 billion (€13.8bn) last year.
Investors fear that the picture is about to darken. The Supreme Court is to rule on whether to close the ruling Justice and Development (AK) party, while police are widening their investigations into a military coup attempt. Political jitters are not good for economic prospects.
In addition, the country’s three-year loan agreement with the International Monetary Fund (IMF) – an important anchor of investor confidence – recently expired. Mehmet Simsek, the Turkish treasury minister, indicated this month that a precautionary accord may be drawn up, but for the time being the IMF (to which Turkey still owes $7bn) is acting only in an advisory capacity.
Double-digit inflation
Inflation, relatively stable since 2004, has recently returned to double digits – government statistics last month put year-on-year inflation at 10.7%. Overall inflation estimates for 2008 have been revised upwards from 4% to 9.3% to take into account rising commodity prices and the weakened lira.
Higher inflation and slowing domestic demand will dampen growth. The Organization for Economic Co-operation and Development (OECD) last month forecast that growth will drop to below 4% in 2008 from a high of 8.4% in 2005.
But the resilience of the economy should not be underestimated. The country impressed with its recovery from the 2001 economic crisis – the result of an internal government clash over banking regulation that led to hundreds of thousands of job losses. The crisis impelled politicians to implement serious reforms – some imposed as part of its EU accession programme and others part of the IMF loan conditions. New fiscal policies were devised and structural reforms undertaken to stabilise the economy, reduce high public debt and attract foreign money.
Two years ago, the stock market and the lira both dived as investors reacted to government wavering on political and economic reforms, leading to widespread prophesies of doom. Again the economy recovered with remarkable speed, thanks to the reforms.
Public debt
The economy is now more stable, but public debt remains a problem. The IMF in May prescribed tighter fiscal discipline to help achieve government plans to slash public debt by around 10% in the next five years.
Achieving this aim would, it is hoped, open the way to important reforms in areas like labour and education, setting the country on its way to closing the gap in living standards with the west. But it will be an uphill struggle. Current political tensions do not bode well, particularly against the backdrop of the global credit squeeze. A reversal of capital inflows would spell disaster for the economy.
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