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Turkey in a week, September 24th

Finance Minister Berat Albayrak presented long-waited Medium Term Plan last week. The plan was 10 days late as Albayrak was having meetings with representatives of the corporate sector and the banking sector all week before announcing the plan. Expectations about the plan was mainly three fold: a realistic assessment about the state of the economy, relating to this, realistic targets for the main economic parameters such as growth, unemployment, inflation, and current account deficit; a direction for the fiscal policy; and finally a plan addressing private sector’s debt problem, in other words, a plan for restructuring mounting debts of the private sector. It was assessed that if these expectations could be met, Turkish Lira’s depreciation can be controlled which will ease private sector’s debt problem and inflation at least in the short term.

The name of the Medium Term Program was changed to New Economic Plan (NEP) as changing the names of things became almost a rule for the new Erdoğan management. According to NEP, Turkey reduced its growth projections to 3.8% from 5.5% for 2018, the same day OECD cut its growth forecast for Turkey to 3.2%. With the revised growth forecast which was 5.5% for 2018, the Turkish government showed that they are accepting the seriousness of economic problems the country faces, although Erdoğan kept saying “There is no crisis in Turkey. It’s mere manipulation” one day before NEP’s announcement.

While revised growth estimates and a plan for 76 billion Turkish Lira public spending cuts seem to be satisfactory for the markets and observers, the plan was criticized on the grounds that it lacked a clear plan for the debt-restructuring problem of the banks and the corporate sector. This plan was critical for Turkish Lira’s depreciation too since, for the moment, the demand for foreign currencies of firms with high FX debt cannot be declined otherwise. Thus, Turkish Lira gained more than 2% before NEP announced, then after the plan it stabilised around 6.30 again.

The government’s key economic targets in MTP are given below in Table 1. Inflation forecast for 2018 is up to 20.8% from unrealistic 13.4%;  unemployment rate will reach to  11.3% by the end of 2018 and 12.1% in 2019. According to the latest unemployment data for August 2018 the unemployment rate is already 10.4%. The government aims to have 1.9% budget deficit by the end of 2018 and keep it below 2% next 3 years. 50 billion Turkish Lira public spending cut and 16 billion Turkish Lira revenue increase (2% of 2018 tax revenues) are planned in 2019 in order to achieve these budget targets. However the biggest cut will be made from the public investment budget. It is planned 30.9 billion cut from the public investments of 2019 which makes 30% of 2018 public investment expenditure. 13 billion of the spending cut will be from social security expenditures, which has been very important for AKP governments to secure political consent of the citizens with low incomes. The budget cut in public investment will probably guarantee shrinking in the economy in 2019. OECD reduced its growth forecast for 2019 0.5% already, almost 2 percentage points lower than NEP target. The most unrealistic target of NEP is probably current account deficit. According to NEP current account deficit will be as low as 3.3% in 2019 and take down below 3% as early as in 2020. Depreciated Turkish Lira is the main reason for this optimistic current account balance, which has already started to fuel exports and tourism revenues. However, it seems the government thinks Turkish Lira will appreciate in real terms relative to inflation next three years. If this is the case, how exports will increase enough to decrease current account deficit to the levels in NEP given import dependency of Turkey. Moreover, with public investment cuts and highly indebted exporter companies, production activities will probably decline, making these current account deficit targets too ambitious.

Table 1: NEP Main Targets
  GDP Growth Current Account Deficit (% of GDP) Inflation Unemployment Budget Deficit (% of GDP) Primary Surplus
2018 3.8 4.7 20.8 11.3 1.9 0.1
2019 2.3 3.3 15.9 12.1 1.8 0.8
2020 3.5 2.7 9.8 11.9 1.9 1
2021 5 2.6 2.6 10.8 1.7 1.3

It seems from NEP that the government still counts on foreign investment for the coming years even tough net direct investment is negative and net short term capital inflows has turned to negative since March. Another measure the government introduced on September 19th also indicates that the government does not have any other economic plan other than hoping to attract capital flows. Last week the required limits for foreigners to acquire Turkish citizenship were reduced radically to encourage foreign investment. The lower limit of fixed capital investments to acquire Turkish citizenship for foreigners has been reduced to $500,000 from $2 million. While foreigners who own real estate in Turkey worth a minimum of $250,000, instead of $1 million, will qualify to apply for Turkish citizenship, the deposit requirement of minimum $3 million in Turkish banks has also been lowered to $500,000.

Growth in the second quarter shows a slowdown already

Growth numbers for the second quarter were just released last week as well. Turkey’s economy already started showing signs of a slowdown. GDP rose 5.2% in the second quarter after 7.3% growth in the first quarter. A closer look to the data shows consumers and investors starting to reach their limits. Construction sector particularly, the engine of the economy during all AKP governments and real estate activities hit the bottom in the second quarter with growth rates of 0.8% and 0.2% respectively. Construction sector is very likely shrinking in the third quarter as housing sales in August  dropped 12.5% relative to August 2017 according to the latest data from Turkish Statistical Institution. 67.1% drop in sales with mortgage credits relative to August 2017 is the reason behind the contraction. On top of that, Turkish consumer confidence index is down to 59.3 in September from 68.3 in August, the biggest monthly decline on record. Consumer index dropped below 60 only two times since 2004, in November-January 2009 and in September 2015.

Table 2: GDP Growth of Turkey (Annual Growth-%)


  1. Quarter 2. Quarter
GDP (purchaser’s price) 7.3 5.2
Agriculture, forestry and fishing 6.1 -1.5
Industry 8.1 4.3
Construction 6.6 0.8
Services 10.4 8.0
Information and communication 5.9 7.0
Financial and insurance activities 3.0 12.1
Real estate activities 3.4 0.2
Household final consumption expenditure 9.35 6.33
Government final consumption expenditure 4.92 7.18
Gross fixed capital formation 7.94 3.91
GFCF – Construction 10.53 6.62
GFCF – Machinery and equipment 6.43 0.55
Exports of goods and services 0.67 4.54
(Less) Imports of goods and services 15.36 0.26


The number of the firms applied for bankruptcy is increasing. A report in Turkish press suggested that some 100 companies applied for bankruptcy among them there are two big exporter companies 95 years old Burak Aluminum and 58 years old Teknik Aluminum. Also very important shoe brands announced debt restructuring plans one after another. Hotiç, Yeşil Kundura, Beta and a chain Shoes Center, worldwide brands in the shoemaking sector have both applied for debt restructuring and started closing down their stores. According to a piece in Hurriyet Daily News, Turkey is the fifth biggest shoemaker in the world with the capacity of making 500 million pairs of shoes on an annual basis with export revenue of nearly 1 billion US dollars.

Amid these developments in the economic front, Erdoğan started seeing foreign investors. He held a meeting with American investors last week and he is going to Germany to convince foreign investors to come back to Turkey.

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