In 2022, economic of Turkey witnessed a growth slowdown, expanding by 5.6%, a notable decline from the previous year’s impressive 11.4%. This deceleration was primarily attributed to a loss of momentum in exports, investment, and manufacturing activity. Nevertheless, the economy found resilience in private consumption, which surged by 19.6% during the same period. The services sector spearheaded value-added growth with a 9.7% increase, while the industry sector contributed with a 3.3% uptick. The labor market, buoyed by robust economic growth, fully rebounded from the pandemic’s impact. Despite these positive aspects, the Turkish lira experienced a significant depreciation of 30% in 2022, despite efforts involving an estimated $108 billion in indirect forex interventions by the central bank (CBRT).
Macro-financial conditions have become increasingly challenging, marked by a 24-year high in CPI inflation. Heterodox regulatory policies have begun to impede credit growth, aligning lending rates with reductions in the policy rate. While the banking sector maintains adequate forex liquidity buffers for short-term liabilities, concerns linger regarding the accessibility of these buffers during times of stress. The rising exposure of banks through incentivized holdings of government bonds also heightens contagion risks.
Fiscal support measures include increasing civil servants’ salaries and pensions, energy subsidies, personal income tax allowances, eliminating a retirement age requirement, and providing financing support for businesses. Despite rapid growth contributing to a reduction in debt-to-GDP levels, the government’s cost of borrowing remains high, with a Eurobond issuance in January 2023 carrying a 9.8% interest rate with a 10-year maturity.
Looking ahead to Turkey’s economic outlook, 2023 is anticipated to face growth challenges due to earthquake-related disruptions in production, export, and consumption. However, economic activity is expected to remain robust, supported by a substantial 55% net minimum wage increase in January 2023 and expansionary fiscal policies leading up to the May elections. The massive reconstruction efforts in the earthquake zone are projected to have significant multiplier effects, boosting growth in late-2023 and beyond. Nevertheless, pre-election spending and earthquake recovery efforts may weaken fiscal balances, potentially exacerbating inequality, especially in the most affected provinces, which were home to 30% of Turkey’s poor in 2020.
The economic outlook is characterized by considerable uncertainty and risk, stemming from the current macroeconomic policy mix. Post-election economic performance will hinge on policy decisions aimed at gradually phasing out the heterodox regulatory web distorting financial markets. Furthermore, the adoption of macroeconomic policies to rebuild buffers and support investor confidence will be crucial. Inflationary pressures may arise from fiscal expansion and earthquake-induced disruptions in agriculture and logistics. External risks remain elevated, considering the high current account deficit, low net forex reserves, the external share of public debt, a slower-than-expected recovery in the EU, and tightening global liquidity. There is also a looming risk of faltering investor confidence, potentially intensifying pressure on the Turkish lira, external balances, and corporate and bank balance sheets, with the potential for policy responses causing a real sector contraction.
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