The Turkish government has revised its year-end economic targets amid regional turmoil, rising inflation, a weakening currency and shrinking industrial output. The revisions were announced Oct. 8 as part of Ankara’s new medium-term program, its economic road map for 2015-17. The growth forecast was slashed to 3.3% from 4% for 2014, and to 4% from 5% for 2015.
Efforts to rein in inflation have proven a huge disappointment. Accordingly, the year-end estimate was raised to 9.4% from the earlier 5.3% projection, a level Turkey could now hope to achieve only in 2016, if everything goes as planned.
While Ankara has failed on inflation and growth, it has achieved notable progress in reducing the current account deficit. The economy management will now shift its priority to battling inflation and move the current account deficit problem to second place, with structural reforms third on the priority list.
Deputy Prime Minister Ali Babacan, who is in charge of the economy, pledged the required structural reforms, a key issue for foreign investors, will be sped up in a bid to prop up growth.
Turkey’s main economic targets for the next three years, announced at a news conference attended by Babacan and five other ministers, were as follows:
Gross domestic product (GDP) per capita: $10,537 at the year-end; $10,936 in 2015; $11,541 in 2016; and $12,229 in 2017. (The original target for 2014 was $11,277, meaning it has been postponed by two years, to 2016.)
GDP growth: 4% in 2015; 5% in 2016 and 2017.
Inflation: 6.3% in 2015; 5% in 2016 and 2017.
Unemployment: 9.6% in 2014; 9.5% in 2015; 9.2% in 2016; and 9.1% in 2017.
Investment: Public investment to reach $85 billion by the end of 2014. A preliminary $88 billion will be allocated for public investment in the 2015 budget.
Budget deficit: 1.4% of GDP at the year-end; 1.1% of GDP in 2015; 0.7% of GDP in 2016; and 0.3% of GDP in 2017.
Foreign trade: Exports are expected to reach $160.5 billion and imports $244 billion in 2014. Projections for the next three years: $173 billion in exports and $258 billion in imports in 2015; $187.4 billion in exports and $276.8 billion in imports in 2016; $203.4 billion in exports and $297.5 billion in imports in 2017.
Tourism: Revenues from tourism are expected to reach $29.5 billion by the year-end, and are projected at $31.5 billion in 2015; $33.5 billion in 2016; and $35.5 billion in 2017.
Privatization: Revenues from privatization are estimated at $8.7 billion in 2015 and $6.7 billion in 2016. Tax revenues and primary expenditures are expected to increase by 19.7% and 5.1%, respectively.
Is current account deficit reduction healthy?
Turkey’s most remarkable achievement this year has been the reduction of the current account deficit, which is expected to fall to 5.7% of GDP by the end of the year. The deficit stood at 7.8% of GDP ($65 billion) in 2013, well above the deficits of other emerging economies such as India, Brazil, South Africa, Chile and Indonesia.
In the previous medium-term program, the current account deficit for 2014 was projected at $55.5 billion. The revised projection has put the figure further down, at about $46 billion. But despite the progress, the decrease is not quite healthy. The rise in exports has had a positive effect in reducing the deficit, but one should keep in mind that slowing growth is another factor that narrows the gap. The economy would have gained more if the decrease in the current account deficit had been accompanied with strong growth, driven by structural reforms.
The current account deficit target was set at 5.4% of GDP for 2015 and 2016, and 5.2% of GDP for 2017. The target rates in the previous program stood at 6.4% for 2014; 5.9% for 2015; and 5.5% for 2016. According to Babacan, the targeted deficits translate to $46 billion in 2014 and 2015; $49.2 billion in 2016; and $50.7 billion in 2017.
Larger domestic savings
The low level of Turkey’s domestic savings is a major reason for its dependence on short-term capital inflows, or the so-called hot money. According to Babacan, domestic savings are expected to reach 14.9% of GDP at the year-end, with the targets set at 15.2% in 2015; 16.2% in 2016; and 17.1% in 2017.
In sum, all of Turkey’s economic targets except for the current account deficit have been revised downward in the new, medium-term program. It remains to be seen whether the lower targets will be achieved.