Complex Made Simple

Turkish growth: Officials cautious as political uncertainty looms

* Turkish growth likely to miss government forecasts this year and the next

* Political uncertainty and referendum on constitutional change delaying investment


Turkish growth is likely to miss government forecasts this year and the next, officials said on Monday. This comes as the uncertainty about emergency rule after July’s failed coup and an expected spring referendum on constitutional change delay investment decisions, they added.

Turkish growth looks ‘impossible’

Four senior government officials told Reuters that official growth forecasts for 2016 and 2017 of 3.2 and 4.4 per cent respectively now looked almost impossible to achieve, against a backdrop of political turbulence at home and in the region.

Growth in the third quarter may come in at zero or turn negative, meaning the figure for 2016 as a whole is likely to be roughly 2.8 per cent, the officials said, short of a forecast that the government has already revised down once this year.


(Video: Economic headwinds for Turkey)

People are looking at politics

“In my opinion, people are looking at the political conditions, not the economic conditions,” one of the officials said, speaking on condition of anonymity because the government’s official forecasts remain unchanged.

“Emergency rule is a big concern for foreign investors. It has caused a reduction in investment, and consumers also prefer to wait until things are clear,” the official said.

July’s failed military coup, uncertainty over the emergency rule imposed in its wake, wars in neighbouring Syria and Iraq, and a string of bombings have all damaged investor appetite in Turkey’s $720 billion economy.

Concern about the rule of law, a key issue for foreign direct investors, has been exacerbated by the dismissal or detention of more than 110,000 civil servants, members of the security services and other officials since the coup attempt.

Industrial production shrank 3.1 per cent year-on-year in September, official data showed last week, prompting economists to cut their growth forecasts. The lira currency has hit a series of record lows in recent weeks.


(Turkey considers further tax cuts to boost growth)

Bad Q3

After a torrid third quarter, the economy was expected to steady somewhat in the final three months of this year, helped by measures including planned temporary tax reductions and efforts to boost credit supply, the officials said.

A cap on the deposit rates banks can offer government agencies is expected this week, a bid to bring down the cost of borrowing and spur lending. The central bank has said it will start offering a fixed interest rate on lira required reserves in another bid to boost credit supply.

Finance Minister Naci Agbal told Reuters further temporary tax reductions may also be made to fuel growth.


(Turkey’s role in world trade of oil, gas and grains)

No quick fix

But such measures will take time to kick in.

“Whatever we do, we can’t change the growth rate in the short term, with just two months left of the year. What is important is 2017,” the first official said.

Growth next year is expected to miss the government’s 4.4 per cent forecast, the officials said, with an expected spring referendum on changing the constitution to create a stronger presidency likely to prolong political uncertainty.

“Constitutional debates and internal politics have a considerable effect on growth. The debate on the executive presidency needs to be resolved swiftly,” a second official said, adding growth next year could remain under 4 per cent.

President Tayyip Erdogan and government officials say Turkey needs the strong leadership a powerful presidency would afford, to avoid the sorts of fragile coalition governments that hampered economic development in decades past.

Erdogan’s critics fear such a change would bring increasing authoritarianism, setting the stage for a polarising campaign, which is likely to distract the government from pushing ahead with long-awaited structural reforms.

A Reuters poll of 27 economists last month suggested Turkey will miss its official growth forecasts for the next three years partly because of reform delays.

The government had already slashed its growth outlook in October and raised its inflation and unemployment forecasts. At the start of this year it was expecting growth of 4.5 per cent in 2016 and five per cent in 2017.