Today’s data is a mixed blessing for Turkey
Since 2003, when Recepp Tayyip Erdogan first came to power, Turkey’s economy has tripled. Widely credited for this ‘economic miracle’, the charismatic leader pledged to renew this achievement by… 2023. A promise that has helped him win his… third electoral victory last June. And so far economic data seems to vindicate his ambition: Turkey’s economy grew at a historic 11 per cent, overtaking even China, during the first… three months of year. Three seems to be a lucky number for Mr Erdogan.
Today’s growth figures for the second quarter of 2011 follow the same trend. Numbers were expected to be down to 6-8 per cent, due to a deteriorating global environment and softer domestic trends; yet once again they beat predictions, reaching an estimated 8.8 per cent.
Good news? Well, maybe not.
Mostly this growth results from a surge in credit - boosting domestic demand - itself largely financed by foreign capital inflows. This creates a yawning current account deficit, leaving the country vulnerable to external shocks on the international markets. Turkey’s deficit reaches 9 per cent of GDP, and is financed at 60 per cent by short term capital from abroad.
On top of this comes a stronger-than-expected inflation. Mainly it’s a consequence of Turkey’s weakening currency - the Lira - which pushed up the cost of imported good. But it’s worrying all the same: it is itself the result of a cut in interest rates, which the Central Bank used to address the gapping current account deficit. Stubbornly high growth, which most say will continue to feed in high inflation, is putting the Central Bank in front of hard choices.
Lastly is Turkey’s unbalanced tax regime. Whilst most Western nations would envy Ankara’s healthy budget balance, its over reliance on indirect taxes means it would be disproportionately affected by a slowdown in consumer spending. The latter would also weaken the government ability to address unemployment, should it flare up again. And given that consumers can’t keep on piling up debt forever, this might happen sooner than we think (by 2012, according to observers).
Three problems that put Turkey’s economy to its most serious test so far. If the country continues growing fast, the first two will be exacerbated. But if it faces sharp economic slowdown, tax revenues will decline and unemployment could reach double digits. So Turkey is vulnerable. If the miracle is to continue, Mr Erdogan will need more than magic numbers to strike the right balance.