Turkey’s Surprise Rebound: 4% GDP?

Researchers from the Institute of International Finance bumped up their forecast for Turkey’s economic growth to 4.2% for 2017, reflecting a rebound after the attempted coup in Turkey last year took a huge bite out of commerce.

IIF economists Ondrej Schneider and Ugras Ulku, and analyst Yalcin Oney, who recently returned to Washington, D.C. from Turkey, published a note Thursday raising their GDP forecast to 4.2% for 2017 (previously 3%), and to 3.5% for 2018 (previously 3.2%). Data are now showing the effect of government efforts to stimulate borrowing after the coup attempt in mid-July, which was followed by more than 100,000 arrests, detentions or firings in the government’s ongoing coup investigation.

In November the government funneled 25 billion Turkish lira ($7 billion) into a credit guarantee. The goal was “to boost bank lending by 250 billion lira in 2017, or roughly 13% of the existing loan book of Turkish banks.” In addition, the government cut some taxes and deferred social security contributions to loosen money flows. Then, in April, a narrowly-won national referendum gave President Recep Tayyip Erdogan more control through constitutional amendments, lifting a cloud of uncertainty, even if he was already considered an authoritarian.

The IIF trio thinks the environment is positive for real GDP, which slid to 2.9% in 2016 from 6.1% in 2015, with reduced political uncertainty after the April referendum, ongoing fiscal easing and a credit guarantee fund. But rising interest rates will weigh on investment and consumption later this year, the IIF researchers conclude, adding:

” … banks have so far given out roughly TL140 billion in loans under the Turkish Treasury’s guarantee. As a result, it appears that a bulk of the recent pick-up in bank lending to the corporate sector was driven by the government’s augmented credit guarantee fund (CGF) program, which allows banks to offer loans more easily, as part of the credit risk is covered by the Treasury guarantee. … The government guaranteed scheme has encouraged banks to restructure some of their existing (and often non-performing) loans into the CGF program. Such portfolio shifting provides little support to economic activity but it should give support to bank profits in 2017 …
To overcome structural impediments to growth and tackle the persistent external deficit problem, reforms or further incentives for innovations geared towards increasing value added of exports are needed. Channeling a higher share of the working age population and investment into technological innovation and R&D, thus helping Turkey to produce higher value added tradeables and improve productivity and competitiveness, should improve exports and growth potential significantly.”

Source: Barrons