Headwinds warning amid rapid Turkish economic growth

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Turkey’s economy is full of contradictions. It’s a rising star with a racing growth rate, but the volatile Turkish lira currency has investors worried and inflation hits record high.

In the third quarter of this year, Turkey’s growth rate certainly gave its leaders something to boast about. Prime Minister Binali Yildirim said the nation was at “the top of the list” with economic growth at 11.1 percent, a world record that Yildirim says “suits Turkey.”

Trade is booming as well. In December, year on year, the nation reached 155.5 billion in exports.

Turkey's Prime Minister Binali Yildirim. /VCG Photo

The surprising high growth rate has Turkey in the same ranks as India and China.

With construction booming thanks to cheap credit and high government spending, some economists are urging Turkey to create long-term economic policies to ensure stability.

“The Chinese government has created ways to deal with its credit problem. It wants to shift away from industrial production and investment to consumer economy and high technology. They have 10-year plans. Turkey should do the same,” Atilla Yesilada, a Turkish economist, told CGTN.

The Turkish lira has significantly depreciated against the US dollar, dropping 11 percent since September. This, in turn, led inflation to hit a record 13 percent in November.

VCG Photo.

Markets were hopeful that the Turkish central bank would ease some of the pain with a rate hike, but the central bank last week left the benchmark repo rate and overnight borrowing rate unchanged at 8.0 percent and 7.25 percent respectively. Only the late liquidity window lending rate was increased from 12.25 to 12.75 percent.

In its statement, the central bank still left the door open to a future rate hike, saying its "tight monetary policy stance" will be maintained until the inflation outlook demonstrated a "significant" improvement.

Nevertheless, the Turkish lira has continued to weaken.

Analysts have warned that the impressive growth figures could mask trouble ahead for the economy, with a currently widening deficit and much of the increase in activity built upon credit.

"The economy's problems of high inflation, unanchored inflation expectations, rapid credit growth and a widening current account deficit, mean monetary conditions will need to be tight," read a research note from William Jackson, emerging markets economist at Capital Economics in London.