Last week I analyzed the performance of the Turkish economy in my column. Today I want to focus on my projections for next year.
The Turkish economy grew by 8.9 percent during the 2010-2011 period, making it one of the world's fastest-growing economies. However, this was achieved at the expense of deteriorating inflation as well as a current account deficit (CAD). Inflation exceeded 10 percent and the CAD reached almost 10 percent of gross domestic product (GDP) in 2012.
These developments prompted the Central Bank of Turkey to tighten its policy to rein in bank lending. It seems that Turkey has completed the process of normalizing the overall macroeconomic climate at the end of 2012. Growth has slowed markedly since mid-2011, with a deceleration in domestic demand only partly offset by surging exports. Growth decelerated to almost 3 percent this year. As a result, the large CAD has begun to narrow and might be recorded at a level of 7-8 percent of GDP at the end of 2012.
Also it is expected that yearend inflation figures will be between 6-7 percent. For the year 2013, growth is projected to regain momentum on the back of recovering domestic demand that would be fostered by increased access to loans as long as fiscal and price developments allow it. Growth will rise to around 5 percent in 2013. However, inflation and the CAD are projected to remain well above comfort levels due to the recent process of rebalancing, not as a result of significant achievements on the structural front.
Moreover, gains in competitiveness, mainly stemming from the nominal exchange rate depreciation in 2011, have since largely been eroded. Therefore, Turkey has to manage a number of developments in 2013. Obviously, the country has the capability to motivate growth in 2013 well above 5 percent by fostering domestic demand. However, as mentioned above, this process is limited by fiscal and price indicators.
Therefore, as suggested by Organization for Economic Cooperation and Development (OECD) economist Rauf Gönenç, last month, “Monetary policy should continue to focus on disinflation. Fiscal policy could play a more active countercyclical role if international and domestic conditions worsen. However, this should be done without undermining fiscal credibility. Fiscal credibility would be bolstered by introducing a public spending ceiling and publishing quarterly consolidated general government accounts based on international standards.”
Two recent developments should be taken into account in this regard. The Federal Reserve (the Fed) of the US announced new targets in the economy. To remind, the Fed announced that the currently near-zero interest rate level will be kept until unemployment falls closer to a normal level of 6.5 percent provided that inflation remains below its target of roughly 2 percent annually. In order to ensure this, it is expected that monetary easing will continue at least until the end of 2015.
Also, the same aggressive monetary easing process started in Japan last week. Having considered that the same process has been under implementation in the eurozone, it can be expected that excess liquidity will flow into the emerging economies that have dynamic growth potential with relatively robust macroeconomic indicators. The address in 2013 is obviously Turkey. That is why credit rating agency Fitch Ratings improved Turkey's rate to an investible country category. Based on these developments, the central bank announced its 2013 monetary program last week. With this program, the central bank announced a new policy tool to limit risks of excessive debt in the banking system by placing higher reserve requirements on banks that fail to meet specified leverage ratios. It has a significant signaling effect on the market players that macro-prudential measures will be more active in 2013.
Until Turkey accomplishes its painful and costly structural reforms with a dependable social compromise, the country will try to maintain its growth, CAD and inflation level at 5 percent, a level that is not satisfactory in the longer term.