4 things to know about Turkey’s economy

Once the fastest-growing economy in the G20, Turkey suddenly has a lot on its plate: the global slowdown, the fallout from the Eurozone crisis, wars in neighbouring Iraq and Syria, terror attacks, the migrant crisis, fighting between the army and Kurdish rebels, and political turbulence.

In Sunday’s snap election, President Recep Tayyip Erdogan’s Justice and Development Party (AKP) regained the majority it lost in June, returning the country to single-party rule.

Erdogan’s party, which has held office since 2002, has been handed a strong mandate. The election result has driven up the Turkish lira – but Turkey’s economic woes are far from over. Here are four key challenges that lie ahead.

Growth? What growth?

Turkey is one of the MINT countries (Malaysia, Indonesia, Nigeria and Turkey) that were tipped to be the world’s next big emerging economies after the BRICS. It still remains one of the world’s top 20 economies – 18th according to the World Bank – but its once high-flying growth has slowed.

After reporting growth of around 9% in 2010 and 2011, the economy expanded by just under 3% in 2014. This is projected to pick up gradually over 2015 and 2016.

Currency woes

The AKP’s outright election win provided the lira with a much-needed boost on Monday – to 3%, a three-month high against the dollar. In September, the lira, one of the most vulnerable emerging-market currencies, fell to a record low. Recently, the national currency has been battered by political uncertainty, the prospect of a credit rating downgrade and a rate increase in the United States.

Fading optimism

Consumer confidence is nearing a five-year low, according to an index by Turkish Statistical Institute and Central Bank of the Republic of Turkey (CBRT). This is not surprising given that, this year, unemployment reached its highest level in five years. Three years ago it dipped below 8%, and now it’s around 11%. Meanwhile, gross domestic product per capita has been stuck at around $10,000 for several years.

Turkey’s current-account deficit is also high, although less so than in the early months of 2013.

Foreign investors’ equity holdings have fallen by $6.6 billion and their bond holdings by $13.5 billion since the start of the election cycle in March 2014, according to central bank data.

Mending bridges with the central bank

Following the election, investors will be looking for clues as to the state of relations between Erdogan’s government and Turkey’s central bank. The relationship came under strain after political attacks on the bank’s leadership. The central bank has struggled to hit its inflation target and faced criticism for raising rates. Inflation in September rose to 7.9%, above the central bank’s 5% target.

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Author: Rosamond Hutt is a Senior Producer at Formative Content. 

Image: Children playing soccer are seen through Turkish flag. REUTERS/Fatih Saribas