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Mukhamejanova G.R. Macroeconomic situation in Turkey: interim results, challenges, and forecasts

The complicated geopolitical situation in the region, the military coup attempt, alongside with political instability challenged the Turkish economy in 2016. The slowdown in economic growth has resulted in a fall of tourist inflows and reduction in private and foreign investment.

The government applied a set of fiscal measures to revive the economy. The administration introduced state programs, such as Credit Guarantee Fund (KGF), aimed to stimulate lending, where it acted as the principal guarantor for loan applications for small and medium-scale business. Along with state guarantees, the government expanded credit lines, lowered taxes and introduced free banking standards. These measures stimulated significantly the growth of domestic consumption. Despite IMF forecasts of economic growth for no more than 2.9%, short-term fiscal measures gave a positive result [1]. Given the government fiscal stimulus, the EBRD has sharply raised the forecasts for the Turkish economic performance, from 2.6% to 5.1%.

The economic growth. By the end of 2017, Turkey has become one of the largest economies in the region, growing from 3.2% in 2016 to 6.7% in 2017 [3], surpassing the government’s projections of 4.4% for 2017. Recently, the Turkish Statistical agency provided data for the III quarter of 2017 (July-September).

GDP in the III quarter rose by 11.1%, while in 2016 the growth rate was negative (-0.8%). GDP in current prices rose by 24.2% compared to 2016 and amounted to 827 billion 230 million TL. This growth is primarily due to the increase of domestic and external consumption. The tax breaks helped to increase household spending, which increased by 11.7% in the third quarter of 2017.

According to the World Bank, in 2018 the growth rate in Turkey will drop to 3.5%, as the impact of the fiscal measures will gradually fade. The EBRD also estimates the growth of the Turkish economy of 3.5% in 2018 [4].

Large Turkish banks give positive forecasts for 2018. According to some experts, these projections are applicable to companies working on big budgets in Turkey. İşbank predicts economic growth of 4.1% and inflation of 10.2% in 2018. Garanti Bank forecasts, the growth rate of the economy will stand at 4.5%, and the exchange rate of a dollar will equal to 4.14 TL [5].

International trade. The foreign trade deficit increased by 52.4% in November 2017 and amounted to $ 6.32 billion. Exports of goods and services grew by 11.2%, while imports rose by 21.3% [6] for the 11-month period in 2017 compared to 2016. Exports also grew amid increasing demand from the EU and improved competitiveness as a result of currency depreciation in 2016 [7]. Exports to the EU-28 increased by 17%, from $ 5.967 billion to $ 6.983 billion. The share of EU countries in the export of goods and services in November 2017 equaled 49.1%, whereas in November 2016 it did not exceed 46.7%.

Following the interim results of 2017, Germany was the top trading partner of Turkey ($ 1.376 billion). Turkish goods were also of interest to citizens of the United Kingdom ($ 908 million), Italy ($ 839 million) and the United States ($ 733 million). Germany also tops the list of importing countries of Turkey. In 2017, Turkey imported goods from Germany for $ 1.982 billion. Then follows China ($ 1.981 billion), Russia ($ 1.906 billion) and Italy ($ 1.16 billion) [8].

Unemployment. According to official data, for the first three quarters of 2017, there was an expansion of the labor market. Compared to 2016, the number of employed increased by 1.378 million people and amounted to 28.645 million (47.6%). The number of unemployed at the age of 15 and over reduced by 360 thousand people to 3.287 million people. The coefficient of labor participation increased by 0.7% and reached 53.1%. There was a slight rise in employment of men and women by 0.3% and 1.1%, respectively. The share of employment stood at 72.4% among men and 34.2% among women.

The structure of employment by sector is as follows: 54% of the workforce was engaged in the service sector, 19.3% in agriculture, 19.1% in industry, and 7.6% in construction. In general, unemployment in the country equaled 10.3%, including the youth unemployment rate of 19.3% (a reduction by 1.9%). The unemployment rate among people aged 15 to 64 years was 10.5% (a decrease of 1.5%) [9].

Investments. In 11 months of 2017, FDI in Turkey fell by 9.5% compared to the same period in 2016 and amounted to $ 9.8 billion. Europe remains the leading investor region in Turkey’s business. 68 % of all investments in Turkey flow from the EU countries. From January to November 2017, Turkey received $ 4.5 billion of European equity investments, which is 63% more than in 2016. The total FDI inflow from the EU was $ 6.6 billion. The top FDI inflows came from the Netherlands ($ 1, 64 billion), Austria ($ 306 million) and Germany ($ 241 million).

During this time, 5,145 new companies, including 55 branches of international companies, were established with the participation of foreign capital. Overall, as of November 2017, Turkey has more than 58 thousand companies with foreign assets, 38% of which operate with the EU capital [10].

Inflation and budget deficit. Notwithstanding the vigorous economic growth and the positive investment climate, experts point to two challenges awaiting Turkey in 2018: double-digit inflation and budget deficit. In December 2017, consumer prices fell to 0.69%, and annual inflation rocketed to 11.92%. This figure is significantly higher than the targeted 5% of Central Bank and remains to be one of the highest rates for the past 14 years [11]. For comparison: in December 2016, the inflation rate was 8.53%. In general, inflation creates significant risks for the Turkish economy. Over the past two years, Turkey’s current account deficit has increased due to rising defense spending and stimulation of the economy. In 2017 the growth of budget deficit until 61.7 billion TL, twice exceeding the figures of 2016 is anticipated [12]. In 2018, the budget deficit will equal to 1.9%.

Turkey’s external debt reached $ 435 billion, while international liabilities in foreign currency rose to $ 212 billion [13]. The Central Bank left interest rates at the same level and confirmed the determination to control inflation. It will continue to use all available instruments, including tight monetary policy, to ensure price stability [14].

Exchange market. Political tensions with the US affect currency markets and lead to an even greater depreciation of the Turkish lira (TL), which only exacerbates the pressure on the Central Bank of Turkey. According to experts, the Turkish lira will remain responsive to the development of political dialogue due to the low level of the real interest rate. Corrective measures to increase the interest rate by half a percentage point were not effective enough. The dollar, which was worth about 3.4 TL at the end of August 2017, traded in the middle of December for more than 3.85 TL [15]. Currently, the official exchange rate for American dollar is 3.75 TL.


2017 was a turning point for the Turkish economy. Dynamic growth and favorable indicators are the results of effective measures of the state to stabilize the economy. Now the prime task of the state is not only to make this growth sustainable but also to prevent price destabilization. The state will continue to pour resources into the economy, thereby increasing the budget deficit. Continuation of military operations in Syria will further contribute to the growth of military spending.

The depreciation of the Turkish lira gave a positive effect (export growth) but created risks for banking structures. If the level of lending continues to be much higher than the level of deposits, it will force banks to resort to external borrowing, and will further complicate the situation in the banking sector. The dynamics of growth will also depend on how favorable the political and financial environment will be, affecting the trade, economic and investment relations. Confrontation with the United States on the supply of American weapons to Syrian Kurds, the military operation in Afrin and strained relations with the EU may negatively affect the macroeconomic performance of Turkey. The progress in updating the Agreement on the Customs Union with the EU could facilitate the positive dynamics of growth.

In general, despite several risks and challenges, the prospects for the Turkish economy look quite favorable so far, especially since the Turkish economy is in the top 20 economies of the world and has every chance to lead the ranking of countries with developing economies.


[1] Turkey : 2017 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Turkey //http://www.imf.org/en/Publications/CR/Issues/2017/02/03/Turkey-2017-Article-IV-Consultation-Press-Release-Staff-Report-and-Statement-by-the-44614.

[2] EBRD lifts 2017 growth forecasts as economic recovery strengthens //https://www.ft.com/content/cc6a73fa-c3ad-11e7-a1d2-6786f39ef675.

[3] Europe and Central Asia //http://pubdocs.worldbank.org/en/465111512062598806/Global-Economic-Prospects-Jan-2018-Europe-and-Central-Asia-analysis.pdf.

[4] EBRD lifts 2017 growth forecasts as economic recovery strengthens //https://www.ft.com/content/cc6a73fa-c3ad-11e7-a1d2-6786f39ef675.

[5] Bank forecasts for 2018 and the possible consequences//http://www.hurriyetdailynews.com/opinion/erdal-saglam/bank-forecasts-for-2018-and-the-possible-consequences-125582.

[6] Quarterly Gross Domestic Product, III. Quarter: July-September, 2017 //http://www.turkstat.gov.tr/PreHaberBultenleri.do?id=24569.

Foreign Trade Statistics, November 2017//http://www.turkstat.gov.tr/PreHaberBultenleri.do?id=24832.

[7] Europe and Central Asia //http://pubdocs.worldbank.org/en/465111512062598806/Global-Economic-Prospects-Jan-2018-Europe-and-Central-Asia-analysis.pdf.

[8] Foreign Trade Statistics, November 2017//http://www.turkstat.gov.tr/PreHaberBultenleri.do?id=24832.

[9] Labour Force Statistics, October 2017 //http://www.turkstat.gov.tr/PreHaberBultenleri.do?id=27691.

[10] Turkey sees nearly $4.5 billion EU investment during January and November 2017 //http://www.hurriyetdailynews.com/turkey-sees-nearly-4-5-billion-eu-investment-during-january-and-november-2017-126220.

[11]Inflation targets //http://www.tcmb.gov.tr/wps/wcm/connect/tcmb+en/tcmb+en/main+menu/monetary+policy/price+stability/inflation+targets.

[12] Turkey’s parliament approves 2018 budget //https://www.reuters.com/article/us-turkey-budget/turkeys-parliament-approves-2018-budget-idUSKBN1EH07H.

[13] 2018 fraught with uncertainties for Turkish economy //http://www.al-monitor.com/pulse/originals/2017/12/turkey-2018-is-fraught-with-uncertainties-for-conomy.html#ixzz55Z3QIjOw

[14] Press Release on Interest Rates 18/01/2018. (2018-01) //http://www.tcmb.gov.tr/wps/wcm/connect/tcmb+en/tcmb+en/main+menu/announcements/press+releases/2018/ano2018-01.

[15]Indicative Exchange Rates. //http://www.tcmb.gov.tr/wps/wcm/connect/tcmb+en/tcmb+en/main+menu/statistics/exchange+rates/indicative+exchange+rates.

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