IMF says Turkey's economic growth to slow to 2 percent
IMF says Turkey's economic growth to slow to 2 percent
IMF assessed Turkish economy underlining that it continued to grow strongly through the first half of 2011, reaping the benefits of institutional reforms and revamped policy frameworks implemented in the previous decade. However, growth became increasingly fueled by domestic demand and imports. This was supported by strong credit growth, reflecting an appreciated currency combined with low interest rates and a surge in short-term capital inflows. The current account deficit widened sharply to near 10 percent of GDP. Inflation is rising quickly, reflecting pass-through from a large nominal depreciation since late 2010, numerous tax and regulated-price increases, and underpinned by tight domestic supply conditions, and is forecast to reach 9,5 percent at end 2011, well above the point target of 5,5 percent.
The externally-financed demand boom has weakened Turkey’s resilience in some areas. Capital inflows are dominated by potentially-volatile financing, and short-term external debt has climbed sharply. With banks absorbing much of these inflows, an external funding shortfall will slow down credit. Nonfinancial corporates’ net FX liabilities increased substantially, exposing them to currency depreciation. While the headline fiscal balance continues to improve and the public debt-to-GDP ratio is declining, fiscal performance has been supported by benign economic conditions at home and abroad.
The IMF underlined in its latest report that policy responses were insufficient to prevent the development of a large current account deficit and high inflation. Monetary policy shifted to an unconventional mix of reserve requirements, the interest rate corridor, and the policy rate, which has not demonstrated it can deliver price- or financial–stability. Numerous prudential measures aimed at slowing credit growth and building buffers were introduced but, from a macroprudential perspective, were sometimes delayed. The primary balance of the nonfinancial public sector continued to improve, largely reflecting buoyant—but transient—tax revenue from the boom in output and imports and proceeds from a tax restructuring scheme, which masked a relaxed fiscal stance.
The IMF underlined that growth is expected to slow sharply to 2 percent in 2012 due to weaker capital inflows, reflecting in part concerns about Turkey’s large current account deficit. More limited foreign financing would constrain the current account deficit to about 8 percent of GDP and compresses imports. In line with Turkey’s previous capital flow-driven corrections, with fewer imports of key raw materials and intermediates, GDP growth is forecast to be sharply scaled down. Inflation is projected to decline to a still-elevated 6,5 percent, eroding external competitiveness.
Executive Directors commended the Turkish authorities for their agile economic management during the global crisis, which, together with structural reforms undertaken earlier, had contributed to a rapid recovery. Going forward, Directors urged the authorities to rebalance the policy mix to ensure a soft landing, in view of volatile capital flows, a widening current account deficit, and an externally financed credit boom. Tightening the structural fiscal position and gearing macroprudential policies to preventing systemic risk would allow monetary policy to focus on price stability, helping to preserve the credibility of the inflation-targeting framework and strengthen Turkey’s resilience to changes in global liquidity conditions. It will also be important to accelerate structural reforms to reverse eroding competitiveness and improve the business climate, facilitating current account adjustment.
Directors noted the strong performance of the banking sector, but encouraged further efforts to address weaknesses in the financial sector, in particular its vulnerability to an external funding shock and possible deleveraging by banks in the region. They urged caution in implementing near-term measures to bolster banks’ resilience so as to avoid a sharp drop in credit. Timely detection and response to future emerging systemic risk is crucial, along with further strengthening of financial sector oversight and regulation, as recommended in the Financial Sector Stability Assessment. Directors saw an important role for the recently established Financial Stability Committee in this regard. They underscored the importance of Turkey bringing its Anti-Money Laundering/Combating the Financing of Terrorism legislation into line with international standards.
Directors endorsed labor and product market reforms to enhance competitiveness and social equity. They recommended measures to enhance labor market flexibility, tailor training to employers’ skill needs, and better align employment costs—including the minimum wage—with regional peers. Timely adjustment of regulated energy prices to movements in the domestic cost of imports would help lower Turkey’s energy trade deficit.
The externally-financed demand boom has weakened Turkey’s resilience in some areas. Capital inflows are dominated by potentially-volatile financing, and short-term external debt has climbed sharply. With banks absorbing much of these inflows, an external funding shortfall will slow down credit. Nonfinancial corporates’ net FX liabilities increased substantially, exposing them to currency depreciation. While the headline fiscal balance continues to improve and the public debt-to-GDP ratio is declining, fiscal performance has been supported by benign economic conditions at home and abroad.
The IMF underlined in its latest report that policy responses were insufficient to prevent the development of a large current account deficit and high inflation. Monetary policy shifted to an unconventional mix of reserve requirements, the interest rate corridor, and the policy rate, which has not demonstrated it can deliver price- or financial–stability. Numerous prudential measures aimed at slowing credit growth and building buffers were introduced but, from a macroprudential perspective, were sometimes delayed. The primary balance of the nonfinancial public sector continued to improve, largely reflecting buoyant—but transient—tax revenue from the boom in output and imports and proceeds from a tax restructuring scheme, which masked a relaxed fiscal stance.
The IMF underlined that growth is expected to slow sharply to 2 percent in 2012 due to weaker capital inflows, reflecting in part concerns about Turkey’s large current account deficit. More limited foreign financing would constrain the current account deficit to about 8 percent of GDP and compresses imports. In line with Turkey’s previous capital flow-driven corrections, with fewer imports of key raw materials and intermediates, GDP growth is forecast to be sharply scaled down. Inflation is projected to decline to a still-elevated 6,5 percent, eroding external competitiveness.
Executive Directors commended the Turkish authorities for their agile economic management during the global crisis, which, together with structural reforms undertaken earlier, had contributed to a rapid recovery. Going forward, Directors urged the authorities to rebalance the policy mix to ensure a soft landing, in view of volatile capital flows, a widening current account deficit, and an externally financed credit boom. Tightening the structural fiscal position and gearing macroprudential policies to preventing systemic risk would allow monetary policy to focus on price stability, helping to preserve the credibility of the inflation-targeting framework and strengthen Turkey’s resilience to changes in global liquidity conditions. It will also be important to accelerate structural reforms to reverse eroding competitiveness and improve the business climate, facilitating current account adjustment.
Directors noted the strong performance of the banking sector, but encouraged further efforts to address weaknesses in the financial sector, in particular its vulnerability to an external funding shock and possible deleveraging by banks in the region. They urged caution in implementing near-term measures to bolster banks’ resilience so as to avoid a sharp drop in credit. Timely detection and response to future emerging systemic risk is crucial, along with further strengthening of financial sector oversight and regulation, as recommended in the Financial Sector Stability Assessment. Directors saw an important role for the recently established Financial Stability Committee in this regard. They underscored the importance of Turkey bringing its Anti-Money Laundering/Combating the Financing of Terrorism legislation into line with international standards.
Directors endorsed labor and product market reforms to enhance competitiveness and social equity. They recommended measures to enhance labor market flexibility, tailor training to employers’ skill needs, and better align employment costs—including the minimum wage—with regional peers. Timely adjustment of regulated energy prices to movements in the domestic cost of imports would help lower Turkey’s energy trade deficit.
