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The Post-Referendum Turkish Economy: How to Write the New Chapter

Turkey has left its constitutional referendum behind, along with the associated political uncertainties.

In fact, not only the referendum but also certain earlier developments including the parliamentary elections in 2015 and the failed coup attempt in 2016 caused the country to deal with uncertainties for a considerable period of time. As a result, the governments in charge could not go above and beyond to implement the policies required for the transformation of the economy. Now that the country seems to have a period of at least two years without any elections on the road, it is time for the government to thoroughly focus on economic priorities. That is indeed what the interested economic agents will be watching in the months and years to come. In that respect, there is no doubt that the success of the Turkish economy in the near future and beyond will depend on how it will maintain and take advantage of its strengths while fixing the weaknesses.

Then, what are those strengths and weaknesses? At this point, starting the story from a growth perspective would hugely help. For one thing, having had exhibited an attractively good growth performance in the post-crisis era, Turkey’s economy slowed down in 2016, mainly due to the coup attempt as well as the terrorist attacks and geopolitical conflicts that the country was exposed to, let alone the loose global tempo. Although the sudden decline recorded in the third quarter of the year turned into a quick recovery in the last 3 months, the economy reduced its speed to 2.9% in full year 2016. For such an unfortunate period and environment, where a variety of domestic, regional and global troubles occurred, a GDP growth slightly below the global average was undoubtedly understandable and even commendable. Nonetheless, such mild performance is admittedly neither compatible with the potential nor adequate for the targets of the country.

Let’s explore why. First of all, Turkey is well recognized with its dynamic and young population structure, with an increasingly improving education level. While this property is a precious asset for the labor force and provides comparative advantage against some ageing peers, it is also the engine of the appetizingly sizable market in the country. The same demographics, in return, bring about challenges in terms of satisfying the employment needs thereof. In other words, it is not an easy job to catch up to the fast-growing labor force participation in the economy. This fact is also inevitably fueled by the refugees embraced in recent years. Hence, considering the unemployment rate that has lately been stuck at low double digits, one can easily see how pros and cons regarding the demographics go hand in hand in the country.

This issue is also linked with Turkey’s target of becoming a high-income economy. As an upper-middle-income country, Turkey has recently demonstrated a sluggish performance in the development of GDP per capita in dollar terms, due to the depreciation of Turkish Lira. While exchange rate stability is obviously significant in this regard, the country also needs to mark strong GDP growth rates to be able to offer its citizens a better welfare. That is why the post-referendum Turkey has to concentrate on solutions that will speed up the economic activity. In this sense, the promising labor force does and will contribute to growth but the key concept in the next chapter of the story will be productivity acceleration. This matter, on the other hand, requires more capital investments with a technology focus, aside from a more efficient education system needed for the sake of medium- and long-run targets in particular.

Another critical aspect that Turkey has to carefully deal with will surely be the current account deficit. First and foremost, it is a fact that the deficit has noticeably been reduced in recent years and therefore the vulnerability involved has weakened. It is pleasant to see a deficit-to-GDP ratio that was scaled from 7.7% in 2013 down to 3.8% in 2016. However, the relevant decline owes much to the collapsed energy prices in this period, which once again underlines the energy dependency of the country specifically. So, for a sustainable and manageable current account balance that would pose minimum risk even in periods of stronger growth, Turkey has to transform its import-dependent structure. That is to say, it should develop its national competence in alternative energy sources as well as in technology, which is another element that accounts for the deficit in question.

The technological gap of interest is simply revealed by detailed foreign trade statistics indeed: High technology products explain a much bigger share of imports as compared to that of exports. That is why; technological development matters not only to boost the economic performance in the country but also to curtail the fragility pertaining to the deficit.

Nevertheless, Turkey’s export development over time is definitely not disregarded at this point as it holds acknowledged achievements in terms of quality and extension. This is because Turkish exports have gone through a change in product composition and become more sophisticated within the last decade, while gaining comparative advantage in certain sectors. Furthermore, the country has diversified its market portfolio remarkably and become one of the top global performers in this regard. Behind this achievement lies its geographical position as well. What is more, diversification in product groups has also been kept quite high within this period.

After all, Turkey has accomplished its growth not by relying on commodities as seen in many emerging peers but by extensively producing in numerous sectors. Herein, the sizable contribution of construction and infrastructure projects is well recognized, while the development experienced in industrial as well as services sectors cannot be ignored. In this context, the main issue in the new period would be sustaining a balanced outlook, while giving rise to strategically important sectors.

For the post-referendum Turkey, a better economic profile also requires stability in many aspects. Price stability is one of them. In this sense, it is apparent that the prevailing stubborn inflation has to be weakened towards the 5% target. For this purpose, a tight monetary policy stance by the Central Bank will be essential, not only to depress the current inflation but also to mend the eroded expectations, for the sake of future price stability. At this point, exchange rate pass-through has to be cautiously taken into account, as well. What is more, curbing the volatile food prices in the market is a major necessity for Turkey, which definitely requires a coordinated institutional effort beyond the Central Bank.

Moreover, as a growth-oriented upper-middle-income country, Turkey aspires to run up the stairs with the support of continuing capital flows. Although portfolio investments would keep flowing with some ups and downs, FDI inflows are particularly desired to soar as they serve as a channel that gives a boost to economic activity, employment and even technological development. In that regard, the “super incentives” package that was recently announced by the government is expected to attract more investors through the project-based and customized support it provides. On the other hand, in order for such appealing incentives to work in an ideally effective way, efforts to improve the business environment should be adamantly carried on.

Besides the afore-mentioned pros and cons, one assuring pillar of the economy for investors is still the robust banking sector it has. Likewise, Turkey has to be credited for the fiscal discipline it has maintained for long years. That is why; the interested and engaged economic actors will stay tuned to watch the course of those crucial anchors.

In this framework, one thing that would serve as a fundamental strength in the new period would be the activation of the reform agenda itself to take care of the main dynamics discussed above. A convincing reform process would also greatly help restore the confidence, which is profoundly needed in the very essence. Last but not least, the confidence of interest should be prudently fed by a constructive economic diplomacy abroad. At this point, beyond shadow of doubt, the foregoing strengths and weaknesses of the economy will also play interactively with the opportunities and threats presented by the outer world.

To conclude; writing a new exciting chapter in the post-referendum period will undeniably be challenging for Turkey’s economy but can be potentially carried out if a strict sense of purpose and strategy is adopted at the point of departure. In the end, success does not just happen. As the saying goes, it is planned for.

Hatice Karahan, PhD

Hatice Karahan received her PhD degree in Economics from Syracuse University, where she conducted research for the Center for Policy Research. She is an associate professor of macroeconomics and currently heads the Department of Economics and Finance at Istanbul Medipol University. Besides, she serves as a consultant for leading business associations in Turkey and writes columns on economics for prominent Turkish newspapers and magazines on a regular basis.

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