For a regular star-performer among emerging markets, the Turkish economy had a modest year in 2014, with the rate of growth easing and the lira tumbling, though exporters managed to post record earnings despite weaker demand from some key markets.

unnamedPlunging oil prices may help Turkey’s economy this year, by further reducing the $76bn trade deficit recorded in the first 11 months of 2014 and lowering production costs. At the same time, an anticipated US interest rate hike could lead to a renewed capital outflow at a time when many of Turkey?s key export markets in Europe are again teetering close to recession.

Growth slips

Economic growth progressively slowed over the course of 2014, from a year-on-year high of 4.7% in the first quarter to a 1.7% expansion in the third quarter, missing expectations and reaching its lowest rate since 2012. A decline in agriculture production and cooling of household spending, which registered only a 0.2% increase at constant prices in the July to September term, were some of the contributing factors to the deceleration.

According to the Centre for Economics and Business Research (CEBR), Turkey will fall two rungs on the ladder of global economies to 19th place in 2014, mainly due to the depreciation of the lira, the report said. GDP is set to decline to $767bn in 2014 from $827bn in 2013, with this setting back the country from its goal of being one of the 10 biggest economies by 2023.

The easing in household spending paralleled a dip in consumer confidence in the latter part of 2014. In its December consumer sentiment survey, state statistics bureau Turkstat found the confidence index had fallen to 67.7 points, its lowest level since the beginning of 2010. This cooling of consumer sentiment ? any figure below 100 indicates a pessimistic outlook ? could impact the retail, real estate and manufacturing sectors in the coming year.

Another factor that could impact the economy will be the general election scheduled for June. While the period leading up to the poll may see increased state spending, which will flow into the economy and bolster growth, it could also result in uncertainty hitting the markets in the second quarter, at least until the outcome of the ballot is announced.

FDI, exports up

More positive news came from the flow of foreign direct investment, which was up 4.7% year-on-year during the 10 months of 2014 to $9.79bn, according to the latest data issued by the Economy Ministry in December.

While foreigners invested heavily in property, spending well over $3bn on real estate, there was also a solid increase in FDI for Turkey?s manufacturing sector, which attracted $2.3bn, more than $1bn up on the same period in 2013. However, total FDI is likely to come in short of expectations, after investment tailed off in the latter months of the year following $5.1bn in the first four months of 2014.

Foreign trade was another bright spot, with exports hitting a record high of $157.6bn, up 4% on the 2013 figure, according to a report released by the Turkish Exporters? Assembly at the beginning of January. The automotive sector was the single largest contributor to overseas sales, generating $22.3bn, a 4.5% increase on the previous year.

The export performance could have been even better but for a fall in trade with conflict-ridden Iraq and a 15% drop in exports to Russia due to an economic crisis triggered by European and US sanctions over events in Ukraine, as well as weakening demand in Europe.

Growth in foreign trade in 2015 will be in part dependent on a recovery in some of Turkey?s main markets. However the expected stronger performance of the US economy, which will have a knock-on effect on its trading partners, could help prompt a rise in demand for Turkish goods and services.

Currency woes

The Turkish lira was shaky in 2014, having plunged to record lows in the opening and closing months of 2014. The currency closed out the year having lost around 15% against the dollar, two-and-a-half times the rate of devaluation from the preceding year.

The currency suffered from a loss of faith in Turkish markets at the beginning of 2014 by accusations targeting senior government ministers over alleged corruption.

Concerns over political instability pushed the lira to around 2.4 to the dollar in December as the US currency enjoyed a surge in value and emerging markets experienced an outflow of capital amid fears of a spillover from the collapse of the Russian ruble. With forecasts that the dollar will continue to gain value as the US economy regains momentum, it is likely the lira will lose further ground in 2015.

In response to the drop in the lira early in the year, the Central Bank more than doubled its key overnight rate from 4.5% to 10% in January, a move aimed at reversing a tide of capital outflows. Despite Central Bank efforts, inflation remained persistently high over the course of 2014. However, indications at the end of the year show that inflation could be easing back, a result of falling oil costs, with the December figure down month-on-month. More importantly, as oil prices continue to plunge, inflation could cool further in 2015.


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