Turkish economy regains some momentum, but under risk: EU

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Turkey’s market economy has become very vulnerable due to the latest global economic developments, domestic political unrest and political turmoil in neighboring countries, the EU has said

 

Turkey remains a functioning market economy, but the latest global economic developments, domestic political unrest and political turmoil in neighboring countries make the economy very vulnerable, said the European Union in the economic criteria section of its latest progress report.

“In the first quarter of 2013, the Turkish economy regained some momentum, but Turkey’s financial markets and the Turkish Lira have subsequently come under severe downward pressure in the context of anticipated changes in the international monetary conditions, domestic political unrest and the civil war in neighboring Syria,” the report read.

The EU said such developments underline the economic vulnerability associated with Turkey’s still large current account deficit and they may threaten a return to growth in the short term.
The report praised some good indicators of the economy at the beginning.

“The Turkish economy slowed down to an annual GDP growth of 2.2 percent from an unsustainable level of around 9 percent in the preceding two years. The slowdown was partly induced by a tightening of monetary policy and was accompanied by a rebalancing of growth from domestic demand to foreign trade, a narrowing of the current account deficit and falling inflation,” the EU said.

The Pre-Accession Economic Program (PEP) for 2013-15, submitted to the commission in January 2013, is based on the assumption of relatively moderate growth and a further reduction of the current account deficit, and this is good, according to the union.

External deficit still large

“However, even in this relatively optimistic scenario, the external deficit remains large. Combined with a precarious external debt structure, it makes Turkey vulnerable to capital flow reversals, either in the context of increasing global risk aversion regarding emerging market assets, or as a result of a rise in perceived country specific risks,” the EU said.

In response to the international monetary changes since May, the Central Bank intervened directly in the foreign exchange market by selling foreign exchange reserves equal to 6.7 billion euros between June and August. It also raised the upper band of the interest rate corridor (the lending rate) by a combined 125 basis points to 7.75 percent.

“The Central Bank continued to pursue multiple objectives within an unconventional and complex monetary policy framework that hampers transparency and predictability. The policy stance was frequently adjusted in response to changing domestic and international conditions,” the EU said.

The reorientation of monetary policy toward easing between mid-2012 and May 2013 seems to have been helpful in stimulating a reacceleration of economic activity in the first half of 2013. And the fiscal policy also has an important role to play in increasing domestic savings and thereby reducing Turkey’s reliance on external financing, the EU said.

“The fiscal performance, however, suffered from continuing expenditure overruns; it was even satisfactory regarding the sustainability of public debt. There was no progress on increasing the transparency of the fiscal framework and adopting a fiscal rule,” the report said.

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