“Turkey’s Economic Outlook for 2017” – Joint THO and GPI Panel
On December 15th, Turkish Heritage Organization and Global Policy Institute co-sponsored an event on Turkey’s economic outlook for 2017.
This past year has been challenging for Turkey’s previously prospering economy. Throughout 2016, Turkey has been facing political and economic uncertainty fueled by geopolitical and domestic developments. The resulting blow to Turkey’s economy has been significant. Multiple U.S. credit rating agencies have downgraded Turkey’s credit rating over concerns about economic stability. Additionally, between July and September, the Turkish economy contracted for the first time since 2009.
To address the complex factors behind these developments and the prospects for Turkey’s economy in 2017, THO and GPI brought together a panel of distinguished experts: Jennifer Miel, Executive Director of the U.S.-Turkey Business Council at the U.S. Chamber of Commerce; and Dr. Senay Agca, associate professor of finance at George Washington University.
The panel was moderated by Dr. Kerem Cosar, associate professor at the University of Virginia. GPI President Paolo von Schirach and THO Executive Director Yenal Kucuker gave opening remarks.
The impact of global and regional uncertainties on the Turkish economy
Dr. Kerem Cosar began the panel by noting that global economic and political uncertainties, particularly in the European Union., have had a significant impact on Turkey’s economic outlook. Dr. Agca echoed Dr. Cosar’s argument and indicated that both internal and external volatilities are creating considerable macroeconomic risks for Turkey.
According to Dr. Agca, Turkey had been facing substantial political and economic uncertainties leading up to 2002, when the AKP administration took office. Reforms enacted by the administration following the 2002 crisis positively changed Turkey’s economic trajectory.
However, it is important to note that this was a period of global liquidity due to other countries following the same monetary policies. Timely and effective reforms combined with global liquidity boosted confidence levels globally, which led to a flow of foreign direct investment (FDI) into Turkey, in turn causing GDP to grow by 7%.
Dr. Agca attributed some of Turkey’s current economic problems to this growth period, which resulted in short-time financing focused primarily on construction and private consumption. Today, Turkey is facing high external debt and a high current account deficit. These issues combined with both domestic and regional political uncertainties have made the risks to Turkey’s economy more pronounced. Lately, proposed changes and discussions on Turkey’s constitution have caused further uncertainty about Turkey’s institutional strength.
Economic opportunities for the U.S. and Turkey
Jennifer Miel discussed the current trade and investment atmosphere, specifically in reference to U.S.-Turkey trade. Miel explained that there are many more opportunities for U.S.-Turkey trade than some current headlines may lead people to believe. According to Miel, there are currently 1,400 U.S. companies doing business in Turkey. In addition, there are about 45,000 foreign companies based in Turkey.
Miel suggested that the parity between the U.S. dollar and the lira can help Turkey boost its exports due to competitive pricing and new market potentials. Bilateral relations between the U.S. and Turkey are not lost; in fact, there has been a continuing increase in exports over recent years. Miel also presented a positive outlook for U.S.-Turkey trade relations during the new presidential administration, noting that the Trump team is “pro-good deals.”
Miel argued that Turkey has been a natural link between the Middle East, Europe, and Asia for over 10,000 years. Today, it is home to strong energy and trade corridors. Due to these geo-strategic links, large companies continue to see Turkey as a base for manufacturing and European operations. U.S. companies especially see opportunities in Turkey in the following sectors: energy, the automotive industry, manufacturing, agriculture, healthcare, and innovative start-ups. There is optimism toward Turkey’s economy due to its strong demographics; nearly half of its population is under the age of 30. As such, despite the difficulties of the past year, the economy is still on track to grow 3% for 2016 and 2017.
Based on company inputs, Miel explained that in leveraging its geo-strategic position as an energy corridor, Turkey has the potential to not only create value-added growth but also become an energy hub. Lower energy prices, which attract foreign direct investment, would be an important factor for manufacturing and agriculture investments. Considering the fact that Turkey already has a fairly diverse manufacturing base, this would help Turkey to break out of the middle-income trap and strengthen its economy.
Lastly, the transportation and infrastructure sector is seeing major developments, including plans for a new airport that will be the largest in the world. This airport will prove to be an effective utilization of Turkey’s location for transit and transportation.
Agriculture, healthcare and start-ups
Miel highlighted the agriculture sector as one of Turkey’s most inefficient sectors. Regardless, agriculture provides opportunities for Turkey to integrate into global chains, gain more investment from foreign companies, and boost exports in this area. U.S. companies are continuing to look to Turkey for consumer products such as olive oil, yogurt, and other dairy products.
Miel said that the healthcare sector has also seen enormous improvements through advancements in medical devices, technology development, and pharmaceuticals. The increase in innovative start-ups has also caught the interest of U.S. companies looking to develop partnerships.
Reforms, currency fluctuations, and credit ratings
Despite a depreciating currency and a 1.8% contraction in Turkey’s economy in the third quarter of 2016, Dr. Cosar stated that the real income levels in Turkey have improved. However, Turkey’s short-term and long-term economic success will depend on various reforms.
Miel argued that reforms on issues such as part-time labor and auto-enrollment for pension plans will help increase domestic savings and strengthen the banking system. In addition to these reforms, Miel suggested that the draft patent law that is currently under review in Turkey will help the country to move up the global value chain. Miel also argued that education, a very critical area for a country with favorable demographics, is the area most in need of reform if Turkey wants to see long-term economic success.
Dr. Agca argued that if Turkey reforms its education system to benefit its younger generation, it will have an considerable regional and global advantage in human capital. According to Dr. Agca, education must be channeled into high value products, specifically in the STEM fields. Additionally, disparity in education across Turkey must be corrected.
With regard to the economy’s current state, Dr. Agca explained that domestic developments in Turkey have fueled existing political uncertainties, leading two major U.S. agencies to lower Turkey’s credit ratings this past year. The private sector has had to bear much of the burden of these losses. There is a debt overhang in the private sector due to the drop in credit ratings, and now interest rates are increasing while the value of the Turkish lira is decreasing.
Miel stated that many investment banks have said that despite the overall downgrade, Turkish companies maintain their own ratings, along with good liquidity and investment appeal. Miel also pointed out that in order to lessen the impact of the credit downgrade, Turkey has been considering other options in its neighborhood such as the E.U., Russia, Israel, Iran, and even Egypt.
Risks remain, but so do opportunities
Dr. Agca listed the large current account deficit and increasing interest rates as major risks to Turkey’s economy. However, she argued that Turkey’s greatest opportunity lies in its very young population. With timely and long-term educational reform for Turkey’s youth, Dr. Agca argued that Turkey can increase its value-added manufacturing base and exports.
Miel said that confidence is the biggest risk for Turkey but agreed with Dr. Agca that favorable demographics could help Turkey to eliminate this risk. Dr. Cosar emphasized that resilience can go a long way toward building confidence in Turkey’s economic environment. He reminded the audience that despite the events of the July coup attempt, which happened on a Friday, Turks were already back to work the following Monday.