According to what published by Intesa Sanpaolo, Turkish GDP growth slowed to around 2014% in 3, from the 4% recorded the previous year. I data collected relating to the first nine months show, on the demand side, a contraction in investments (-1,4%) and a significant slowdown in private consumption (+1,3% from +5,1% in the same months of 2013). The substantial slowdown in domestic demand was partially offset by the recovery of exports (+8,2% from -0,1%), in particular those directed to the EU and US markets, and by the simultaneous contraction of imports (-1,8% ). As far as the supply side is concerned, in the period considered there was a drop in agricultural production, a significant slowdown in construction activity (+2,9% from +7,0%) and slower growth in services (+4,4% from +5,5%), in particular those dependent on domestic demand and tourism. Manufacturing production showed a trend only slightly lower than that of 2013 (+3,5% from +3,7%), still supported by the production of vehicles (+14,4%). The economic and forward-looking indicators show in the final months of 2014 and at the beginning of 2015 an acceleration of production activity supported by foreign demand, while high inflation and past exchange rate depreciation continue to weigh on household confidence and curb demand for credit. Growth prospects have improved in recent weeks, thanks to the large decline in oil prices. This drop substantially reduces your energy bill a country that imports almost all of the hydrocarbons it consumes, leading to a decrease in the current account deficit and offering exchange rate support. Furthermore, the lower costs of hydrocarbons will favor a reduction in inflationary pressures (2014 closed at 8,2% compared to the previous 7,4%), with a consequent positive impact on disposable income and private consumption. The new scenario of improving external position, stable exchange rate and declining inflation will likely lead to monetary policy easing. According to the most recent forecasts, GDP growth could accelerate to around 4% in 2015, excluding impacts deriving from geopolitical tensions involving important trading partners, specifically Russia, Syria and Iraq.
Although inflation remains well above the target value since last April la Central Bank it cut the key monetary policy rate in three stages (7-day repo) bringing it from 10% to 8,25%. The maximum rate was instead decreased by 75bps at the end of August, set at 11,25%. In mid-January 2015, the minimum rate was reduced again (by 50bp to 7,75%) while the maximum rate was left unchanged. These reductions partially reversed the extraordinary measures in January 2014 when, with the lira subject to strong downward pressure, a particularly sustained rate hike was decided. According to analysts, however, the latest rate cuts have in fact been a concession to political pressure rather than an actual easing of monetary conditions. Looking ahead, more relaxed liquidity conditions are possible and therefore a movement of the interbank rate towards the low end of the policy rate range in the face of probable lower pressures due to exchange rates and inflation, while a further cut in the maximum rate.
According to preliminary data, in 2014 the public deficit in relation to GDP was equal to 1,3%, a modest increase from 1,2% of the previous year, while the budget net of interest expenditure recorded a surplus equal to 0,9% of GDP. Il Budget 2015 indicates a target deficit of 1,1%, based on 4% growth. The economy's heavy dependence on capital flows from abroad makes the exchange rate particularly responsive to liquidity conditions and risk appetite on international capital markets. In the absence of reforms that increase the efficiency of the labor market and support the propensity to save, the adjustment of negative current account balances remains entrusted to the depreciation of the exchange rate. Shocks such as the oil shock can then lead to an improvement in the external deficit, thus reducing the condition of overvaluation of the exchange rate.
In 2014, the slowdown in domestic demand and the recovery of exports to Europe led to a substantial reduction in the current deficit, which in 2013 had risen to 7,9% of GDP, while in the previous five years it had averaged 6,4%. From January to November 2014, the balance of payments current deficit decreased to 38,7 billion dollars, compared to 56,7 billion in the same months of 2013. However the excessive dependence of the economy on the flow of financing from abroad persists, where the limited sophistication in domestic production (75% of exports concern agricultural products and manufacturing with medium and low technological content) and the low rate of savings have favored large current account deficit and a still high general price level. These conditions make the economy and the currency particularly vulnerable to changes in liquidity conditions on the capital markets. In this scenario, the rating agencies, which in recent years had rewarded Turkey's sovereign debt in foreign currency with repeated upgrades (investment grade since 2012 for Fitch and since 2013 for Moody's, a step slightly lower for S&P's), have taken a more critic. They underlined the inconsistency of the economic policy, the vulnerability of the external position and the risks of a political nature. Turkey ranks 55 out of a total of 185 countries in the Doing Business ranking compiled by the World Bank, while the World Economic Forum places Turkey in 45th place out of a total of 148 countries in the Global Competitiveness Report 2014-15.
