Turkey Country Risk Report & Analysis

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 because 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 and 2023, with real GDP expanding by +5.5% and approximately +4%, respectively, thanks to strong domestic demand, in particular private consumption. Looking ahead, we expect a further moderation of activity in Türkiye against the backdrop of a slowing global economy and because the government embarked on 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% in 2024, followed by a slight acceleration to +4% or so in 2025.

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, due to the shift to the unorthodox, ultra-loose monetary policy stance in September 2021, even though headline inflation was close to 20% at the time. 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 skyrocketed. 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 critical levels.

Meanwhile, if maintained, the change to a more orthodox monetary policy stance after the general elections in May 2023 – the Monetary Policy Committee (MPC) of the Central Bank of Türkiye (CBRT) raised the key policy rate from 8.5% to 42.5% by end-2023 – should reduce Türkiye’s severe macroeconomic imbalances in the medium term. In the near term, however, economic activity will slow owing to increased interest rates and high inflation. The latter rose again to 65% at end-2023 due to tax hikes and the TRY depreciation after the CBRT halted excessive FX interventions. Going forward, we forecast annual average inflation at around 40% in 2024 and 20% in 2025.

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 more than 180 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 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.