Posted on March 24, 2018

Turkey’s economy experienced a strong growth upturn in 2017. Growth accelerated to an estimated 6.8% compared to 3.2% in 2016. We expect growth to moderate to 5.4% and 5.3% in 2018 and 2019 respectively. Nonetheless, this growth will still keep Turkey amongst the fastest growing major emerging market (EM) economies after India and China.

There are three main factors driving Turkey’s growth trajectory. The first is a government backed credit stimulus. The government launched a TRY250bn (approximately USD70bn) credit guarantee fund (CGF), which guarantees loans to the private sector and is focused on lending to small and medium enterprises. By the end of 2017, 80% of the CGF had been utilised and loan growth reached 20.8%, driving a surge in GDP growth. With the majority of the CGF utilised, credit growth is expected to moderate in 2018 and 2019, causing growth to ease. However, loans made under the CGF are expected to be rolled over when they mature and the additional 20% is expected to be fully disbursed over the next two years, keeping financial conditions accommodative.

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Second, external demand has been an important source of growth for Turkey. Turkey’s largest trade partner is Europe and growth in the European Union (EU) picked up from 1.9% in 2016 to 2.3% in 2017, pushing up demand for imports from Turkey. In addition, tourist arrivals bounced back after depressed levels in 2016. Arrivals gained 27.9% in 2017 compared to a 30.1% contraction in 2016. These factors were highly supportive of robust export growth in Turkey in 2017, estimated at 12.9%. However, EU growth is expected to ease to 2.1% and 1.8% in 2018 and 2019, respectively, and tourist flows, also highly dependent on European growth, are unlikely to accelerate given the rapid growth in 2017. Hence, we believe external demand will be softer in 2018 and 2019, also imposing a small drag on growth.

The third factor is fiscal policy. The authorities eased fiscal policy in 2017 with lower taxes on durable goods and property. The fiscal deficit widened to 1.5% of GDP in 2017 from 1.3% in 2016. We expect the authorities to boost spending and maintain growth-friendly tax policy. The deficit is projected to rise to 2.0% of GDP by 2019. This should partly offset less credit stimulus and softer external demand.

Taken together, these factors point to growth slowing and we forecast average growth of 5.4% in 2018 and 5.3% in 2019 (see our recently released detailed macroeconomic outlook for Turkey). Despite a modest slowdown in growth, Turkey will still be one of the fastest growing EM economies in 2018. Its growth will be outpaced only by India and China - amongst the largest EM economies in the world.