Despite expansionary monetary and fiscal policies, the dynamics of the Turkish economy slowed down significantly last year and the forward indicators point to a persistent weakness in production activities and demand. According to preliminary estimates published by Intesa Sanpaolo Study and Research Centre, the GDP grew by 2,4% in the whole of 2016 compared to the +6% recorded the previous year, while the most recent forecasts by analysts indicate a growth of 2,7% during this year.
In 2016, the inflation trend remained well above the 5% medium-term target of the Central Bank, closing the year at 8,5%, with the trend rising to 9,2% last year January. These boosts should wear off by June, with inflation estimated at around 8% at the end of the year. In this scenario, Turkey's currency proves to be particularly vulnerable to changes in liquidity conditions and propensity to invest in emerging markets. In 2016, the Turkish lira lost a fifth of its value against the dollar, reaching TRY 3,50 : 1 USD. The pressures towards depreciation continued at the beginning of the year and then partially subsided during the month of March.
In 2016 the current deficit remained substantially unchanged (at 32,6 billion dollars, equal to 3,9% of GDP), where the contraction of the trade deficit was balanced by the decrease in receipts from tourism. During the same period, the financial account surplus rose from 10,1 bn to 22,3 bn thanks to the recovery of foreign portfolio investment in the country which more than offset the slowdown in FDI. In the fourth quarter, however, foreign investors reduced their portfolio position in the country, contributing to the fall in the exchange rate seen in the final weeks of 2016 and early 2017. At the end of 2016, foreign exchange reserves amounted to 90,6 billion, equal to just under half of the estimated external financing needs of 178 billion in 2017. At the end of November 2016, the stock of foreign exchange reserves was around 10% lower than the value considered optimal by the IMF analyses. Furthermore, in 2016 the public deficit as a ratio of GDP was 1,1%, whereas the public debt as a ratio was estimated at 30% in the same period.
Moody's and Fitch, respectively last September and last January, they removed the investment grade rating from the country, bringing the rating respectively from Baa3 to Baa1 and from BBB- to BB+. Also in January, S&P, which already viewed Turkey as a speculative investment, introduced a negative outlook to its BB+ rating.
At the same time, in neighboring Lebanon Central Bank estimated a growth rate of between 2016% and 1,5% for the country's economy in 2, in line with the forecasts of Fitch (below 2%) and Moody's (1,7%) and accelerating compared to the 1% estimated the previous year, with expected consumption confirmed as the most sustained component of GDP, while the high cost of money and regional tensions are holding back the propensity to invest. Here then is that GDP growth is expected to accelerate above 2% this year and around 3% in 2018.
In 2016, the average inflation rate recorded a further decrease, albeit more contained than that of 2015 (-0,9% compared to -3,8%). Starting from last September, however, consumer prices started to grow again, after two years, on a trend basis, so much so that at the end of December 2016 the trend rate of inflation was 3,1%. During this year the average rate is expected to be 2,6%. And given the large differential against dollar rates and high real rates, the Central Bank of Lebanon in the last two years has not followed the moves of Federal Reserve, keeping the deposit rate unchanged at around 6%. Last year, continuing a trend that began in the second half of 2014, the nominal effective exchange rate appreciated on the heels of the dollar (since 1999, the Lebanese pound has been kept within a narrow fluctuation band of LBP 1.501-1.514 per 1 dollar) while the real effective exchange rate depreciated to bring it in line with its equilibrium value.
According to IMF estimates, in 2016 the public deficit rose from 7,3% to 7,9% of GDP. The primary surplus fell to 1,1% of GDP, from 1,4% in 2015, while at the end of 2016 public debt was equal to 144% of GDP (38% of GDP the part in currency). The balance of payments records a substantial current deficit (on average equal to 16% in the decade 2006-2015) due to the commercial part, while the "services" and "transfers" accounts show a surplus thanks respectively to income from tourism and workers' remittances emigrated. In turn, the financial account shows a large structural surplus, thanks to the flow of deposits and direct investments from abroad and the currency reserves guarantee ample coverage of the requirement. However, the high dependence on the flow of short-term foreign exchange deposits from non-residents, by their nature extremely volatile and highly dependent on the perception of country risk, and the substantial external debt represent a condition of extreme fragility of the external financial position. So sovereign debt in foreign currency is considered a highly speculative investment by all three major rating agencies (B- for S&P and Fitch, B2 for Moody's).
