New IMF Forecasts Highlight Uncertainty Surrounding Turkish Growth Outlook
A Bloomberg article reported that the IMF revised its Turkish GDP growth forecast upward to 8.7% for 2011, one of the most optimistic forecasts for Turkey’s economy this year. The entire document can be found here. While forecasts, especially into 2012, are marred by uncertainty, the IMF’s projections highlight the risks of another boom-bust cycle in Turkey and the unsustainable nature of growth in 2010 and early 2011. At RGE, we’ve highlighted these risks for some time even noting the structural nature of Turkey’s current account.
Figure 1: IMF’s Updated Forecast for the Turkish Economy
While the 2011 growth figure is impressive, the IMF expects growth to slow to just 2.5% in 2012, reflecting a “sharp domestic demand cycle.” Moreover, even as growth slows in 2012, the current account deficit will remain the largest in the G20, at 9.8% of GDP. That’s slightly smaller than the 10.5% deficit the IMF expects in 2011, but hardly much consolation when put in context of the growth cycle.
Looking at the growth drivers, Turkey’s economy is clearly driven by domestic demand as net exports will contribute negatively to growth in 2011 and 2012. Only in 2009, when the economy nose dived 4.7% did net exports make a positive contribution to real GDP growth.
So, is this boom-bust cycle inevitable or is there something Turkish policy makers can do about it? The IMF argues that both fiscal and monetary policy remains accommodative in many emerging markets: “In emerging and low-income economies, fiscal deficits and debts are being reduced gradually. However, cyclically-adjusted balances are still negative in a number of economies (e.g. Brazil, India, and Turkey), even though demand is at or above capacity.”
In terms of loose monetary policy fueling the economic cycle, “Policy makers in some economies have tightened the monetary stance, but others have fallen behind the curve. The longer that policy tightening is delayed, the greater the risk of a hard landing in the future.” The IMF doesn’t mention Turkey by name, but Turkey is one of the few emerging markets where the central bank has yet to raise interest rates, even cutting rates in an unorthodox policy experiment earlier this year. Recognizing the challenging environment faced by emerging markets, the IMF puts forward the following policy prescription: “In an environment of low interest rates in advanced economies, raising domestic interest rates might attract capital inflows. The correct policy response is not to avoid raising rates, but to implement sound macroeconomic policies, which includes allowing the exchange rate to appreciate when it is not overvalued, and to flexibly employ macroprudential and regulatory policy tools to deter hot flows and guard against misallocation of capital.”
Figure 2: Excessive Credit Growth in Some Emerging Markets
2 Responses to “New IMF Forecasts Highlight Uncertainty Surrounding Turkish Growth Outlook”
Upppssss. Thanks for catching the details. Most of these remarks seem to be directed directly at Turkey- the cyclically-adjusted balance, if you don't adjust monetary policy now, you'll have to adjust more later on and the like. So in a way, The IMF has "published" the Staff Report the Turkish Treasury has been withholding!:):):)
According to a recent study published by CBRT (in Turkish), fiscal policy can be described as pro-cyclical in 2007, counter-cyclical in 2009 and acyclical in 2008 and 2010. The study concludes that fiscal authority gave more importance to economic stabilization in 2009 due to global financial crises. Results significantly differ from the common perception especially with respect to fiscal stance in 2010.
The estimation of the structural budget balance is a very difficult task and therefore cannot be proxied by any simple measure. In CBRT's paper, authors followed a three-step approach: 1) They estimate the elasticity of budget items with respect to GDP, 2) They obtain potential output and the corresponding output gap series, and 3) They calculate the structural budget balance. Since CBRT's methodology is more comprehensive than any other study performed to date of which I am aware, I suggest you to cite this study as a primary reference on the subject and to remain sceptical about the claims of others.