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Prospects for the Turkish economy in 2014 (2)
3.5 percent GDP growth would be a reasonable forecast. A sharper drop in net capital inflows or a significant rise in interest rate would limit GDP growth further and vice versa.
Now it is time for my GDP growth forecast for 2014. Should the baseline scenario I presented before holds, I expect lower GDP growth in 2014 than in 2013. The third quarter GDP growth figure announced last Tuesday suggests that 2013 growth will be near 4 percent. For now assume that it will be a sharp 4 percent. Based on this I estimate that 2014 GDP growth will be around 3.5 percent. Below is the basis for this forecast.
The factors that will drive GDP growth up: on top of the list is exports. The baseline scenario assumed that the European Union (EU) economy will grow by 1.3 percent in 2014. Forty percent of Turkey’s exports are to the EU and 30 percent to the Middle East and North Africa. GDP growth in the latter is expected to increase by 1.7 percentage points in 2014. Again under the baseline scenario, net capital inflows to Turkey will diminish, causing the lira to depreciate. Therefore, export growth in 2014 will be larger compared to 2013 (note that non-gold exports increased by 6.3 percent over the first ten months of 2013).
The factors that will push GDP growth down: the chief one is the weakening of net capital inflows, which implies a smaller volume of foreign funds available for the banking and the corporate sectors. Moreover, decline in net flows puts a pressure up on interest rates and this in the end affects credit supply and demand negatively. Smaller credit volume evidently affects GDP growth adversely.
A second factor is the steps the Banking Regulation and Supervision Agency (BRSA) has initiated. These will reduce consumption expenditures. Similarly, the Central Bank’s (CB) interest rate will be above the 2013 average and it is not certain for how long the rate will be kept high. If the lira is to depreciate in real terms in line with the baseline scenario and inflation rate is to climb as I have presented in a previous commentary, we should expect the CB to maintain the high interest rate for the majority of 2014. Please note that interest rate is high compared to 2013 both in real and nominal terms; it is still lower than the inflation. These are the factors that will limit GDP growth.
Investment expenditures also are important in this respect. Indices reveal a recent improvement in the confidence in the Turkish economy. As a result of this, private investment expenditures increased in the third quarter, for the first time since the early 2012. Under the baseline scenario I expect this trend to halt. Investment expenditures will either grow slightly or remain below the 2013 levels.
In conclusion, 3.5 percent GDP growth would be a reasonable forecast for 2014. A sharper drop in net capital inflows or a significant rise in interest rate would limit GDP growth further and vice versa. But a downwards pressure on GDP growth seems more likely.
PS: it is a common argument nowadays that the FED’s decisions are preempted and thus when the tapering is initiated it will not have a major adverse effect. But we are talking about the FED’s lowering and eventually halting injections. Following these, debates on a possible interest rate hike will come to the radar. All of these would reduce capital inflows towards Turkey and peer economies. By the way, what is with the preemptive debate? What is that we preempt? I am planning to address this issue in more detail soon.
This commentary was published in Radikal daily on 12.12.2013