Download Turkish Economy Still Ailing

April 03, 2017
Economics Group
Special Commentary
Jay H. Bryson, Global Economist
[email protected] ● (704) 410-3274
E. Harry Pershing, Economic Analyst
[email protected] ● (704) 410-3034
Turkish Economy Still Ailing
Executive Summary
Despite an upside surprise to Q4-2016 GDP growth, the Turkish economy appears a long way
from achieving the strong economic growth rates that it registered during the past decade.
Moreover, the country’s chronic current account deficit, which reflects its low national savings
rate, portrays an economy with some macroeconomic imbalance. Turkey financed its current
account deficit in the past decade with strong inflows of direct investment capital, but it has
become more dependent on inflows of easily reversed portfolio capital in recent years–a symptom
of a country with a recurrently low savings rate. Investment into Turkey has recently cooled as
prospects of Turkish entry into the EU have diminished.
The Turkish lira has come under significant downward pressure in recent years, which has forced
the central bank to hike its main policy rate in an attempt to stabilize the currency. Higher
interest rates can weigh on investment spending, which was essentially flat last year. Turkey’s
demographic makeup presents a potential positive opportunity for the country. The working age
population is expected to grow further over the next two decades, which should translate into
more national production, everything else equal. But, in the long term, if Turkey cannot raise its
national savings rate, its long-term economic growth prospects should remain constrained.
Turkey’s
chronic current
account deficit
has hurt
Turkish growth
prospects
recently.
Turkish GDP Growth Surprised to the Upside in Q4-2016
Recently released data show that real GDP in Turkey grew 3.5 percent on a year-ago basis in the
last quarter of 2016 (Figure 1). The strong Q4 figure bested the consensus estimate which called
for just 1.9 percent and comes on the heels of a weak Q3 in which GDP contracted 1.3 percent
(revised up from a 1.8 percent contraction). The bounce back from the year-over-year contraction
in real GDP in Q3-2016, which was depressed by the coup attempt in July, is a welcome
development. However, political uncertainty in Turkey still presents some downside risk to the
country’s economic outlook.
The topline GDP growth rate was broadly supported by its underlying components. Private
consumption grew 5.7 percent, its strongest year-over-year growth rate since Q2 2015 (Figure 2).
Personal spending in Turkey has consistently been a driver of real GDP growth, slipping into
contractionary territory in just one quarter since the global financial crisis of 2008-2009.
Moreover, fixed investment increased 2.0 percent while government spending grew 0.8 percent.
Although we do not explicitly forecast Turkish GDP growth rates, consensus estimates expect
GDP growth to remain modest over the next two years.
This report is available on wellsfargo.com/economics and on Bloomberg WFRE.
Real GDP, led by
strong private
consumption,
grew 3.5 percent
in Q4, beating
analyst
expectations.
Turkish Economy Still Ailing
April 03, 2017
WELLS FARGO SECURITIES
ECONOMICS GROUP
Figure 1
Figure 2
Turkish Real GDP
Turkish Real Personal Consumption
Year-over-Year Percent Change
Year-over-Year Percent Change
15%
15%
20%
20%
10%
10%
15%
15%
5%
5%
10%
10%
0%
0%
5%
5%
-5%
-5%
0%
0%
-10%
-5%
-5%
-15%
-10%
-10%
-15%
-10%
GDP YoY: Q4 @ 3.5%
-20%
2000
Personal Consumption: Q4 2017 @ 5.7%
-20%
2002
2004
2006
2008
2010
2012
2014
-15%
2000
2016
-15%
2002
2004
2006
2008
2010
2012
2014
2016
Source: IHS Global Insight and Wells Fargo Securities
The Current Account Deficit and Macroeconomic Imbalance
Foreign direct
investment and
portfolio
investment into
Turkey have been
a source of
financing the
country’s current
account deficit.
Although real GDP growth returned to positive territory in Q4-2016, the Turkish economy is a
long way from achieving the strong economic growth rates that it registered during the past
decade. Slower global growth has certainly contributed to the deceleration in the Turkish
economy over the past few years. But some of Turkey’s recent economic woes are homegrown as
well. In that regard, the imbalances associated with the country’s chronic current account deficit
have hurt Turkish growth prospects recently.
Turkey has been incurring red ink in its current account since 2003, although the deficit has
narrowed in recent years (Figure 3). As we discuss in more detail below, Turkey runs a deficit in
its current account because its national savings rate, which is abysmally low, falls short of its rate
of national investment. Therefore, the country must borrow from abroad in order to finance its
current account deficit. As shown in Figure 4, most of the capital inflows in the years immediately
preceding the global financial crisis took the form of foreign direct investment (FDI), which is not
easily liquidated. The strong FDI climate at that time reflected expectations that Turkey would
eventually become a member of the European Union (EU).
Figure 3
Figure 4
Turkish Current Account
Turkish Capital Inflows
4-Q Moving Average, As a Percent of GDP
4%
In recent years,
prospects of
Turkish entry into
the EU have
dimmed and FDI
inflows have
cooled.
2%
2%
0%
0%
-2%
-2%
-4%
-4%
-6%
-6%
-8%
-8%
-10%
2001
2003
2005
2007
$60B
$60B
$50B
$50B
$40B
$40B
$30B
$30B
$20B
$20B
$10B
$10B
$0B
-$10B
$0B
-$10B
Portfolio Investment: 2016 @ $7.8B
Foreign Direct Investment: 2016 @ $12.3B
Percent of GDP: Q4 @ -3.8%
-10%
1999
Billions of USD
4%
2009
2011
2013
2015
-$20B
-$20B
2002
2004
2006
2008
2010
2012
2014
2016
Source: IHS Global Insight and Wells Fargo Securities
In recent years, prospects of Turkish entry into the EU have dimmed and FDI inflows have
cooled. Inflows of portfolio investment (i.e., foreign purchases of Turkish stocks and bonds)
became the primary source of financing the country’s gaping current account deficit. Foreign
2
Turkish Economy Still Ailing
April 03, 2017
WELLS FARGO SECURITIES, LLC
ECONOMICS GROUP
investors were attracted to the relatively high rates of return that were on offer in Turkey, and
money flowed into the country.
However, portfolio investment can be easily reversed. When the U.S. Federal Reserve signaled in
2013 that its quantitative easing program would eventually come to an end, bond yields in the
United States rose sharply and portfolio capital started to flow out of emerging markets. The
currencies of most developing countries came under downward pressure at that time, but the
Turkish lira was pounded due to the country’s outsized current account deficit. Between
May 2013, when the “taper tantrum” started, and the end of 2015 the Turkish lira lost 40 percent
of its value vis-à-vis the U.S. dollar (Figure 5). The lira came in for a second bout of punishment
after the failed coup attempt last July. The lira is now down 50 percent on balance since
May 2013.
Figure 5
Figure 6
Turkish Central Bank Policy Rate Corridor
Turkish Exchange Rate
TRY per USD (Inverted Axis)
1.25
1.25
1.50
1.50
1.75
1.75
2.00
2.00
2.25
2.25
2.50
2.50
2.75
2.75
3.00
3.00
3.25
3.25
3.50
3.50
3.75
4.00
2010
4.00
2012
2013
14%
14%
12%
12%
10%
10%
8%
8%
6%
6%
4%
4%
2%
Overnight Lending Rate: Mar @ 9.25%
3.75
TRY per USD: Mar @ 3.718
2011
The Turkish lira
is now down
50 percent on
balance since
May 2013.
2014
2015
2016
2017
2%
Overnight Borrowing Rate: Mar @ 7.25%
0%
2010
0%
2011
2012
2013
2014
2015
2016
2017
Source: IHS Global Insight and Wells Fargo Securities
In an effort to stabilize the exchange rate, the central bank jacked up its main policy rate by
425 bps in early 2014 (Figure 6). It slowly cut rates as the currency stabilized, but it reversed
course when the lira came under renewed selling pressure and hiked rates by 100 bps earlier this
year. Clearly, higher interest rates can weigh on investment spending. In that regard, investment
rose only 1.4 percent in 2014 and 2.5 percent in 2015, and it was essentially flat last year.
The Challenges of Long-term Economic Growth in Turkey
The Turkish economy has the potential to realize strong rates of economic growth in coming
years. The country's population is young, and the number of people of working age (15-64 years
old) has climbed rapidly in recent years (Figure 7). Moreover, the United Nations projects that the
working-age population will grow further over the next two decades. Everything else equal, a
country can produce more if it has increasingly more workers.
In an attempt to
stabilize the
currency, the
central bank
has jacked up its
main policy
rate, which may
be weighing on
investment
spending.
Turkey’s
burgeoning
working age
population
presents a
potential
positive for GDP
growth.
The other determinant of economic growth is productivity growth, which can be enhanced via
rapid rates of capital accumulation. In that regard, Turkey's low national savings rate acts as a
throttle on the country's potential economic growth rate because national savings finance
investment spending. True, investment can grow faster than national savings, but a country then
needs to borrow from abroad to finance its excess investment. As discussed above, capital inflows
can be reversed, especially if they take the form of portfolio investment, which exposes the
country to the whims of foreign investors and bouts of financial instability.
So unless Turkey raises its national savings rate, its long-term economic growth prospects will be
constrained. Persistent deficits by the government help to depress the country's savings rate,
although deficits today are not as gaping as they were about a decade ago. Consequently, the
household and business sectors will need to lift their savings rates, which could then be used to
Turkey needs a
higher savings
rate.
3
Turkish Economy Still Ailing
April 03, 2017
WELLS FARGO SECURITIES
ECONOMICS GROUP
finance rapid rates of capital accumulation, for Turkey to realize rapid economic growth on a
sustained basis.
Figure 7
Figure 8
Working Age Population in Turkey
Turkey Savings & Investment
As a Percent of GDP
70
60
60
50
50
UN Projections
40
40
30
30
20
20
10
10
Thousands
Millions of Persons Age 15-64
70
30%
30%
IMF
Projections
25%
25%
20%
20%
15%
15%
10%
10%
5%
0
1980
0
1990
2000
2010
2020
2030
2040
2050
5%
Gross National Investment: 2015 @ 18.5%
Gross National Savings: 2015 @ 14.5%
Working Age Pop.: 2015 @ 52.5M
0%
0%
90
94
98
02
06
10
14
18
Source: United Nations Statistical Commission, International Monetary Fund and Wells Fargo Securities
Conclusion
Despite an upside surprise to Q4-2016 GDP growth, the Turkish economy appears a long way
from achieving the strong economic growth rates that it registered during the past decade.
Moreover, the country’s chronic current account deficit, which reflects its low national savings
rate, portrays an economy with some macroeconomic imbalance. Turkey financed its current
account deficit in the past decade with strong inflows of direct investment capital, but it has
become more dependent on inflows of easily reversed portfolio capital in recent years–a symptom
of a country with a recurrently low savings rate. Foreign direct investment and portfolio
investment into Turkey, which have been a source of financing the country’s current account
deficit, have recently cooled as prospects of Turkish entry into the EU have diminished.
The Turkish lira has come under significant downward pressure in recent years, which has forced
the central bank to hike its main policy rate in an attempt to stabilize the currency. Higher
interest rates can weigh on investment spending, which was essentially flat last year. Turkey’s
demographic makeup presents a potential positive opportunity for the country. The working age
population is expected to grow further over the next two decades, which should translate into
more national production, everything else equal. But, in the long term, if Turkey cannot raise its
national savings rate, its long-term economic growth prospects should remain constrained.
4
Wells Fargo Securities Economics Group
Diane Schumaker-Krieg
Global Head of Research,
Economics & Strategy
(704) 410-1801
(212) 214-5070
[email protected]
John E. Silvia, Ph.D.
Chief Economist
(704) 410-3275
[email protected]
Mark Vitner
Senior Economist
(704) 410-3277
[email protected]
Jay H. Bryson, Ph.D.
Global Economist
(704) 410-3274
[email protected]
Sam Bullard
Senior Economist
(704) 410-3280
[email protected]
Nick Bennenbroek
Currency Strategist
(212) 214-5636
[email protected]
Anika R. Khan
Senior Economist
(212) 214-8543
[email protected]
Eugenio J. Alemán, Ph.D.
Senior Economist
(704) 410-3273
[email protected]
Azhar Iqbal
Econometrician
(704) 410-3270
[email protected]
Tim Quinlan
Senior Economist
(704) 410-3283
[email protected]
Eric Viloria, CFA
Currency Strategist
(212) 214-5637
[email protected]
Sarah House
Economist
(704) 410-3282
[email protected]
Michael A. Brown
Economist
(704) 410-3278
[email protected]
Jamie Feik
Economist
(704) 410-3291
[email protected]
Erik Nelson
Currency Strategist
(212) 214-5652
[email protected]
Misa Batcheller
Economic Analyst
(704) 410-3060
[email protected]
Michael Pugliese
Economic Analyst
(704) 410-3156
[email protected]
Julianne Causey
Economic Analyst
(704) 410-3281
[email protected]
E. Harry Pershing
Economic Analyst
(704) 410-3034
[email protected]
Donna LaFleur
Executive Assistant
(704) 410-3279
[email protected]
Dawne Howes
Administrative Assistant
(704) 410-3272
[email protected]
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