Assessing Economic Projections in Turkey
Rafik Selim, the Regional Chief Economist of the European Bank for Reconstruction and Development (EBRD), evaluated his forecasts for the Turkish economy following the publication of the Regional Economic Outlook Report, which includes countries where EBRD operates, including Turkey.
Selim noted that they have maintained their economic growth forecast for Turkey at 2.7% for this year and 3% for 2025. He mentioned that the impacts of strict monetary, fiscal, and income policies in the fight against inflation have started to be observed in consumer behavior, resulting in a slowdown in demand.
Despite this slowdown, Selim expressed that consumer demand continues to be a driving force for economic growth.
He explained that while the inflation, which has been quite high for the last two years but has shown a consecutive decline for the past three months, has slowed consumption growth, they have begun to see a balance in growth. He stated, “Internal demand is slowing, but the components of economic growth are changing, and I can say that this will gradually improve. In the second quarter of this year, we observed a 2.5% year-on-year growth, which was the lowest level in the last four years, but the composition of growth was much better.”
He highlighted that they saw a positive contribution from net exports. If this balancing trend continues in the economy over the next few quarters, even if growth hovers around 3%, its composition will continue to improve. Sectors such as trade, logistics, tourism, and construction are strong contributors to growth. If manufacturing also starts to grow robustly, we could witness even higher economic growth than what we are currently seeing.
Selim added that the development they have already started to notice this year and expect to see in the coming years is a normalization process in the driving forces of growth and a balance between domestic and external demand alongside imports.
“CBRT May Begin Interest Rate Cuts Towards Year-End or Early 2025”
Selim pointed out that since the Central Bank of the Republic of Turkey (CBRT) raised its policy rate to 50% in March 2024, a very tight monetary policy has been implemented. He noted that the stance of tight monetary policy is maintained through quantitative and credit tightening; however, these actions take time to impact inflation.
Selim stated that the tight stance in monetary, fiscal, and revenue policies supports the disinflation path, adding, “It is difficult to say how long this strict stance will last. The CBRT may start to reduce interest rates towards the end of this year or early 2025. If the year-end inflation target is around 40%, and if this target is reached, the CBRT will have room to lower the interest rate from the 50% level. Therefore, the rate cut may begin in November, but it may also extend to early 2025.”
He mentioned that if they see anchoring inflation expectations in the November meeting and signs that the inflation path is sustainable and should show signs of monthly inflation, they may proceed with a rate cut. However, they may also await the minimum wage increase for the new year.
Selim expressed that they believe the CBRT could lower the interest rate to between 45% and 47.5%.
He also shared that the EBRD’s inflation forecasts for the end of this year are around the 40% level, stating, “Inflation will continue to decline, but whether it will reach 17.5% by the end of 2025, as foreseen in the Medium-Term Program, depends on the course of monthly inflation and the anchoring of expectations.”
Selim emphasized that efforts have been made in recent months to strengthen the credibility of this message, stating, “This is progressing in the right direction, and this message is being reinforced. In this respect, I can say that the disinflation path is reliable. It has been proceeding as it should so far and will likely continue similarly in the upcoming period.”
“Long-Term Foreign Investors Seek Sustainable Policies”
Evaluating foreign investor interest in Turkey, Selim noted that long-term foreign investors seek certainty and predictability.
He commented, “Direct foreign investors are coming to Turkey, and we can say that the trend is positive, but it is not yet at the desired level. There is a need for more sustainable policies over a long period.” He recalled that Turkey has announced an ambitious strategy to increase its share of global foreign direct investments from 1.5% to 1%, indicating that the current figure is still below 1%.
Selim described the policies in this direction as satisfactory, including regulations and reforms aimed at the business community, concluding, “As predictability increases, we may see an increase in direct foreign investments.”
Source
Arwen Volkov, A graduate of the University of St. Gallen in Switzerland with a degree in International Finance, Arwen specializes in sustainable finance and green investments. She began her career at an investment bank in London, where she developed financing models for environmentally friendly projects. Known for her analytical and strategic thinking skills, Arwen is a sought-after financial consultant. In her spare time, she mentors fintech startups, contributing to their growth strategies. She is also a nature enthusiast and an amateur photographer.
