Turkey: Impressive growth but increasing vulnerability to external factors
Reasons behind growth
Turkey’s economy grew substantially during the first three quarters of 2017, surging by 7.4% compared to a year earlier. During the third quarter, the economy expanded by 11.1% compared to a year earlier, the fastest growth among the G20 economies. This rise largely exceeded market expectations, especially considering the factors that negatively affected last year’s economic activity. This year’s growth has mainly been stimulated by government support, along with rising investments and exports. The recovery in private consumption has also contributed strongly to growth performance. Coface forecasts that the economy will expand by 6.5% in 2017 and 5.2% in 2018.
Turkey’s economic performance was particularly impressive considering that the country had witnessed a series of shocking events in 2016 that threatened its political and economic stability, as well as its security. This resulted in Turkey registering negative growth in Q3 2016, while business confidence dipped and the lira lost 20% of its value against the US dollar over the year. The government subsequently decided to introduce countercyclical measures, by increasing the size of the credit guarantee fund (CGF) to ease small and medium companies’ access to financing. The State acts as a guarantor for credit applications from non-financial companies and the size of the credit guarantee fund has been multiplied by more than ten, to reach 250 billion lira (nearly $64 billion). As of October 2017, the CGF had already allocated 219 billion lira. The impact of this credit supply shock to the second quarter’s GDP is estimated to be +0.7 pp1. Nevertheless, this contribution was not visible in the growth figures for public consumption, which increased by only 3% (year on year) during the first three quarters of 2017. Most of the government’s measures to support the economy were in the form of the CGF and tax cuts (such as on white goods and furniture). The economy has also been supported by mounting investments. During the first three quarters of the year, investments rose by 7.9% year on year, compared with 2.7% year on year in the same period of 2016. Total investments in the economy were led by a 12% jump in construction investments during (...)
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