Türkiye

Türkiye has posted dynamic growth overall in the past two decades, averaging +4% in the 2000s and +5.9% in the 2010s, though annual growth rates have been quite volatile in response to global and domestic shocks. The economy was hit by the Covid-19 pandemic but still managed to expand by +1.9% in 2020, followed by a strong recovery to +11.4% in 2021. However, the latter reflected in part an overheating of the economy as a result of expansionary fiscal policies and an unorthodox, ultra-loose monetary policy stance. The latter culminated in a currency crisis that has been ongoing since the end of 2021. Nonetheless, economic activity held up well in 2022, with real GDP expanding by +5.6%, thanks to strong domestic consumption, which more than offset a sharp investment contraction. Looking ahead, we expect a further moderation of activity in Türkiye against the backdrop of a slowing global economy and because the government announced a consolidation of the loose economic policies after the general elections in May 2023. We forecast real GDP growth to slow down to around +3.3% in 2023, followed by a slight acceleration to +4% or so in 2024.

Consumer price inflation surged from 19.3% y/y in August 2021 to 36.1% at end-2021, and hit a 24-year record high of 85.5% in October 2022, mainly due to the shift to the unorthodox, ultra-loose monetary policy stance in September 2021. At the time, the Central Bank of Türkiye (CBRT) embarked on a monetary easing cycle even though headline inflation at close to 20% would have required the opposite. The Monetary Policy Committee (MPC) of the CBRT lowered its key policy interest rate by a cumulative 1,050bps from 19% in September 2021 to 8.50% in February 2023. This shift eroded investor confidence and sent the Turkish lira (TRY) into a deep dive. As a result of subsequent imported inflation, producer and consumer prices sky-rocketed. Moreover, surging energy and food prices in the wake of the war in Ukraine added to the inflation pressures in 2022. By mid-2023, headline inflation had decreased to around 38%, mainly due to base effects, but the TRY had lost two-thirds of its value against the USD over the prior two years. The depreciation would have been even stronger had the CBRT not frequently intervened in foreign exchange (FX) markets to support the TRY, which, however, reduced its FX reserves to very critical levels. If maintained, the change to a more orthodox monetary policy stance after the general elections in May 2023 – the MPC raised the key policy rate to 15% in June and 17.5% in July and is likely to hike further – should reduce Türkiye’s severe macroeconomic imbalances in the medium term. In the near term (until H1 2024), however, the TRY may still lose some more in value as the CBRT will reduce or halt intervention in FX markets, and this will also keep inflation elevated for some time. We forecast annual average inflation in the range of 35-40% in 2023, and around 20% in 2024.

The business environment in Türkiye has steadily deteriorated over the past years and is now considered below average in our assessment of 185 economies. The Heritage Foundation’s Index of Economic Freedom survey 2023 assigns Türkiye rank 104 out of 184 economies (down from rank 76 in 2021 and rank 64 in 2014), reflecting good scores with regard to tax burden, trade freedom and investment freedom while weaknesses remain in particular with regards to property rights, judicial effectiveness, government integrity, labor freedom and financial freedom. Meanwhile, the World Bank Institute’s annual Worldwide Governance Indicators surveys indicate that the regulatory framework, the rule of law and measures to combat corruption have all weakened since 2014. On a somewhat more positive note, our proprietary Environmental Sustainability Index puts Türkiye at rank 66 out of 210 economies, reflecting strengths in energy use and CO2 emissions per GDP, water stress and general vulnerability to climate change. However, there are still weaknesses in renewable electricity output and the recycling rate.