Publication - Turkey: Staff Concluding Statement of the 2018 Article IV Mission - February 16, 2018
A Concluding Statement describes the preliminary findings of IMF staff at the end of an official staff visit (or ‘mission’), in most cases to a member country. Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF's Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, or as part of other staff monitoring of economic developments.
The authorities have consented to the publication of this statement. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF Executive Board for discussion and decision.
Following a slowdown in activity in 2016, growth recovered sharply last year with the help of policy stimulus and favorable external conditions. Such has been the strength of the recovery that the economy now faces signs of overheating: a positive output gap, inflation well above target, and a wider current account deficit. This increases Turkey’s potential exposure to changing global conditions and underscores the need to address vulnerabilities. To lower internal and external imbalances, staff recommends a recalibrated policy mix—further monetary tightening is warranted, as is careful management of fiscal and quasi-fiscal policies, as well as associated contingent liabilities. Macroprudential policies need to be squarely focused on maintaining financial stability and adequate buffers. Targeted structural reform implementation would underpin growth.
Recent developments, outlook and risks
1. Growth was very strong last year, with some moderation expected in 2018. In 2017, a sizeable credit impulse—driven by state loan guarantees—and fiscal policy supported the economy, at a time when domestic demand seemed anemic. Exports increased sharply, due to stronger external demand, against the backdrop of a softer lira. Growth is estimated at about 7 percent in 2017, well above potential. As a result, the output gap now appears positive, with symptoms of associated imbalances. Under staff’s baseline, growth is expected at 4 percent this year, reflecting in part a weaker policy-driven impulse.
2. Inflation is well above target and is expected to remain so without further policy adjustment. Initially fueled by the large lira depreciation, inflation has since increased, in part due to higher demand, rising cost pressures, and rising inflation expectations. Although base effects are likely to see headline inflation fall during the early part of this year, in staff’s view, without further interest rate increases, inflation is likely to end the year once again in double digits.
3. The external current account deficit looks set to stay above 5 percent of GDP.Although exports have performed very well, higher fuel prices, strong demand-led and gold import increases led to a wider current account deficit last year. This was financed mainly by Eurobond issuance, other portfolio inflows, and by reserve drawdowns, with foreign direct investment (FDI) inflows remaining short of desirable levels. Despite strong partner growth and a recovering tourism sector, continued domestic demand strength and higher oil prices are expected to lead to a further widening of the current account deficit this year, with external financing needs remaining large. Reserves remain relatively low, covering only around half of Turkey’s gross external financing needs.
4. Areas of risk could become more apparent should external conditions take a negative turn. Vulnerabilities include large external financing needs, limited foreign exchange reserves, increased reliance on short-term capital inflows, and high corporate exposure to foreign exchange risk. Signs of possible oversupply in the building and construction sector are also emerging. While risk triggers are, by their nature, difficult to project, they could stem from domestic developments or regional geopolitical developments or changes in investor sentiment towards emerging markets.
The Policy Agenda
The main policy challenge is to recalibrate macroeconomic policies in a measured, yet credible, manner that fosters sustainable growth, while protecting the Turkish economy from downside risks. Combined with focused structural reforms to underpin medium- and longer-term growth, this would leave Turkey better placed to handle any possible reversal of global sentiment towards emerging markets.
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