Turkey Regular Economic Brief 2013-II July In this issue • Following the soft landing in 2012, economic growth is staging a moderate recovery in 2013. • Turkey’s external financing needs remain its critical vulnerability in the face of recent emerging market volatility. • The Government’s new Development Plan provides an opportunity to deepen structural reforms, and thus mitigate external risks and increase potential growth going forward. Following the soft landing in 2012, economic growth is Inflation is likely to remain within the Central Bank’s staging a moderate recovery in 2013. Real GDP 3-7 percent target range this year. After hovering above expanded by 3 percent year-on-year (YoY) in the first 7 percent in the first quarter of 2013, headline 12-month quarter after expanding by 1.4 percent in the fourth quarter inflation eased to 6.5 percent in May. The decline of 2012 and 1.6 percent in the third quarter. Domestic reflected lower food price inflation and favorable base demand was the sole contributor to growth (with 3.1 pps) effects. Meanwhile, in May, the core inflation measure, in the first quarter on the back of an 81.9 percent YoY CPI-I, which excludes food, energy and alcohol prices surge in public investment. Net exports, which were the increased slightly to 5.6 percent, but it is still at the second • Growth in 2013 main driver of growth in 2012, did not contribute to lowest level since August 2011. Inflation is likely to stay to remain growth. Going forward, our growth forecast for end-year within the CBRT’s target interval of 3-7 percent unless below trend, at 2013 is 3.6 percent. there is a significant further depreciation in the Lira and/or an estimated administrative prices hikes in the remainder of the year. 3.6%. • The 12-month rolling CAD amounted to $51.3 billion; it is mostly The current account deficit (CAD) is likely to widen financed by again as domestic demand accelerates, and the external In response to significant capital outflows since mid- portfolio financing requirement remains high. In the first four inflows. May, the CBRT increased borrowing costs and months of the year, the CAD increased by 17.1 percent intervened in the foreign exchange market to stem lira YoY. However, adjusting for the gold trade the year-to- depreciation. Outflows from emerging markets date CAD was down by 5.4 percent YoY thanks to a 27.6 accelerated after the FED’s announcement that it may percent YoY surge in tourism revenues. As of April 2013, reduce the amount of monthly bond purchases at the end the 12-month rolling current account deficit amounted to of 2013. Since mid-May, the TL depreciated by 8 percent $51.3 billion (6.2 percent of estimated 2013 GDP) and the against $ and $/TL exchange rate reached a record high of CAD remains mostly financed by portfolio inflows. FDI 1.95. The main stocks market index (ISE-100) eased by inflows were muted in the first four months of 2013 at just 20 percent during the same period, and the benchmark $3.1 billion compared to $5 billion a year earlier. As yield jumped by almost 300bps. In response to these domestic demand picks up, we expect the CAD to widen developments, the CBRT sold $1.9 billion dollars of further in the coming months and amount to 6.9 percent of reserves, which, however, remain comfortably high at GDP in 2013 as a whole, up from 6.1 percent in 2012. As • Global trends $127.5 billion (6 months of imports) as of June 21st. The may limit the of April, Turkey’s total external financing requirement CBRT also increased effective borrowing costs by 100bps room for the remains high at an estimated $220 billion (more than 25 by limiting the amount of liquidity provided to the market. Central Bank to percent of GDP) in the coming 12 months. Tighter global liquidity conditions could limit the room for support the the CBRT to support economic growth going forward. economy. Medium-Term Macroeconomic Projections 2013 2014 2015 2016 2017 Real GDP growth rate (percent) 3.6 4.5 4.7 5.1 5.1 Consumer price inflation (end period, in percent) 6.2 5.2 5.0 5.0 5.0 Public sector primary balance (in percent of GDP) 1 1.6 1.7 1.7 1.8 1.8 Gross public debt (in percent of GDP) 39.2 37.7 36.1 34.6 33.6 Gross external debt (in percent of GDP) 43.6 43.4 42.7 42.4 41.8 Current Account Deficit (in billions of US dollars) 57.2 61.2 64.9 64.2 62.5 Current Account Deficit (in percent of GDP) 6.9 7.1 7.2 6.8 6.3 Reserves (incl.gold, in billions of US dollars) 124.3 127.3 129.8 131.4 132.6 Source: World Bank Staff Projections, 1Program definition Solid fiscal performance in the first five months of accompanying risks to growth and long-term prosperity. 2013 has been supported by domestic consumption; To help sustain strong growth, Turkey needs to pursue year-end targets seem attainable. The central structural reforms, including those that boost productivity government budget posted a surplus of TL4.3 billion ($2.2 to support competitiveness, help increase domestic • Number of billion) in the first five months of 2013 compared to a savings, and attract more FDI and other sources of long- participants in deficit of TL432 million ($222 million) a year earlier. In term finance. Private pension reform was a positive step the private the same period, primary balance also increased by 8.7 towards this goal with the number of participants in the pension percent YoY and reached TL26 billion ($13.4 billion). private pension system increasing by 14 percent since the system Total revenues increased by 8.0 percent YoY in real terms beginning of the year. In addition, a new commercial code increased by thanks to increased VAT revenues, while real expenditures and a capital markets law should help the country attract 14 percent. rose by 4.8 percent YoY. Absent unexpected shocks, end- more FDI and increase competitiveness. Highlighting year fiscal targets look attainable. However, revenues these reforms and remaining fiscal and financial sector remain highly dependent on domestic consumption and buffers, Moody’s joined Fitch in rating Turkey’s sovereign the resulting cyclicality poses fiscal risks going forward. debt at investment grade in May. But to tackle Turkey’s structural vulnerabilities and prevent further volatility in We expect growth to increase gradually to 5 percent its growth performance, a sustained reform effort will be over the medium term. Thanks to a recovery in private necessary. investment and a gradual improvement in global demand, • We expect The government’s new Development Plan is an we forecast growth to accelerate to 4.5 in 2014 and to 4.7 growth to opportunity to deepen the reform effort during 2014- percent in 2015. Despite some expected tightening in increase 2018. The macroeconomic targets are ambitious, with gradually to 5 global liquidity conditions, financing is expected to remain adequate, facilitated by continued solid macroeconomic growth rising to 5.5 percent a year, inflation slowing to 4.5 percent over management in Turkey. With reforms likely to boost percent, and the current account deficit stabilizing around the medium term. productivity and competitiveness, the current account 5 percent of GDP. To help achieve these goals, the plan deficit is projected to ease to around 6 percent despite outlines 25 program areas for further structural reforms, to stronger growth. be backed with specific action plans and target outcomes. To boost the economy’s potential, the plan includes Turkey’s continued dependence on short-term external measures in the areas of competitiveness (innovation, financing poses the main downside risk in the short business climate, financial markets), inclusion (female term. A decline in risk appetite among emerging market employment, labor markets, health, education, and also investors prompted by an early exit from expansionary justice and human rights), public sector management policies in advanced economies or a worsening of (local government, spending efficiency, tax reform), conditions in the Euro zone could dampen Turkey’s sustainable development and resource management growth performance. Compared to the risks emanating (energy efficiency, water management, sustainable cities, • The from the global economy, the possible adverse impacts of disaster risk management). government’s the recent social disturbances are likely to be muted, new unless the tourism sector sustains lasting damage which Contacts: Development Marina Wes: mwes@worldbank.org presently seems unlikely. Strong first quarter growth Cevdet Cağdaş Ünal: cunal@worldbank.org Plan outlines provides a solid basis for 2013 and we thus have not ambitious revised our short-term outlook since mid-May. targets. Recent structural reforms brought a second investment grade rating in May (Moody’s). Further progress is essential to mitigate external risks and increase potential growth. Developments since mid-May have highlighted again the volatile nature of capital flows to emerging markets, including Turkey, with the