As part of a series of articles on the Turkish economy, I will provide a snapshot of the economy beforehand. The first issue of this series will be mostly about the positive real economic transformation and the strong infrastructure built in the past two decades. In the upcoming issues, though, I will be further digging into financial and macro-monetary weaknesses.
The goal, of course, is to come up with some policy suggestions, provide a fresh perspective and sift out a road map for the post-election period. After all, Türkiye is, indeed, treading a fine line between liberal and interventionist policies. Yet, it has not yet been able to fully benefit from political stability and the transformation into a presidential system.
First and foremost, despite the recent uncertainties due to the COVID-19 pandemic, wars in the region, financial speculations, regional conflicts, energy and food crises, trade wars and a coup attempt, Türkiye’s longer-term economic prospects are promising. President Recep Tayyip Erdoğan promises a new course of revivification and a much stronger economy during the second century of Türkiye, or “Türkiye’s Century,” as they like to call it.
A speedy post-earthquake recovery and revitalization is one of the new focuses. Furthermore, despite seldom volatilities in financial variables, Turkish real economic activity is and has predominantly been positive. Turkish companies are thriving. Despite huge inflation and exchange rate volatilities, the economy grew by 11.4% in 2021 and set another 5.6% growth in 2022.
Path to economic recovery
Türkiye is also currently suffering global economic uncertainty due to wars, diverging policies and political uncertainties. However, the real economy (economic activity) side has indeed been a success story, in the past 20 years. Meanwhile, Türkiye also seems to adopt a more independent economic and national development policy (as in the national technology initiative) with its unique policy approaches.
Growth rates were 5.6% in 2022, 11.4% in 2021 and 1.9% in 2020 (despite the pandemic). Türkiye was one of the few countries able to grow even during the pandemic in 2020. Per-capita gross domestic product (GDP) surpassed the upper-middle income threshold of the World Bank in the past 20 years. The new target is to get into the high-income countries league.
Türkiye has created a more resilient and self-reliant economy. The Turkish economy is not as fragile as it was in the 1990s. External dependence has decreased, and increased economic independence is prioritized nowadays. Public-private partnerships have also helped the country avoid the costlier external funding options.
A strong infrastructure has been a cornerstone of the past 20 years. In particular, the strategic infrastructure investments in transportation, logistics, health, education, defense industry, the national tech initiative as well as the industrial and manufacturing regeneration have all helped transform the Turkish economy.
The “Century of Türkiye” vision is a new nudge, built on the strong infrastructure and political stability entrenched in the past 20 years. A booming tech sector with a number of new unicorns (even decacorns now), high tech incentives, technological advances and successful entrepreneurs will all help brace the economic transformation.
Fiscal discipline is another notable success story. Public finances are much healthier and more disciplined today. The low budget deficit, at around 0.9% in 2022 (thanks to a more than 100% rise in tax collections) is a good sign. The chronic budget deficit in Türkiye has thus been resolved and fiscal discipline has been achieved for the most part.
We also need to take a step back and see the bigger picture. Türkiye has recently had a relatively independent political and economic stance. The country has, in the meantime, been aiming to resolve its long-term financial fragility issues in a relatively short time period. Aiming to achieve rather longer-term goals in a relatively shorter time period has, naturally, been much costlier.
Türkiye has also sorted out its over-dependence on external sources for defense needs and military equipment. However, given the high risk assumed, Türkiye will either rise as a much more powerful regional economic and global political center of gravity or it will face another financial crisis. And I would see the first option more likely. These policies are helping increase economic independence too.
A huge current account deficit challenge is a reality. Exports are strong, but imports are even stronger. Energy and other commodity such as gold imports are massive. The price elasticity of imports is also small. Meaning large volumes of intermediary goods are also needed for production and exports. However, most importantly, financing this huge current account deficit is an even bigger issue.
Türkiye does not have its own reserve currency; thus, it always needs foreign currency-denominated liquidity to finance its external deficits. Therefore, it will need to either zero out its current account deficit or it should be able to always find access to the required reserves. On the other hand, huge amounts of short-term portfolio investments (in the past) have caused huge financial instabilities and led to the financial woes mentioned beforehand.
Huge gold imports are a reality nowadays in most developing countries seeking more economic and financial independence. New energy investments, as in nuclear power plants, natural gas and oil discoveries and renewable (green) energy investments, are all crucial steps forward for decreasing energy imports. Though, until then, rising energy needs and increasing prices should (at least) not increase Türkiye’s energy dependence.
Türkiye is also about to be at the center of the new trade routes, on the new-era Silk Roads. New generation transit, logistics and transportation routes are being built around Türkiye. Thanks to the brand-new railway, port and highways, it should be able to connect the Eastern and Western economies and the trade routes. It could also be placed at the center of and as a new energy hub of trade, logistics and transit passage of the hydrocarbon reserves of the Middle East, the Eastern Mediterranean, Central Asia, the Caucasus and Russia.
Economic independence, on the other hand, has been a key issue of concern for the modern republic since at least the Izmir Economic Congress of 1923. The Turkish delegate to the Lausanne Conference was also predominantly concerned about economic independence. All capitulations and special economic privileges from the Ottoman era were rejected back then. Türkiye seems to have the same economic independence concerns nowadays.
Türkiye should also turn the current global turmoil into an opportunity by creating new brands, increasing its added value and strengthening its position as a country that has a say in any regional or international political or economic issue. There should be a reality of Türkiye that does not have to imitate anyone and does not have to cozy up to anyone either. A country that sets its own national policies.
On the other hand, political instability and uncertainties would certainly be consequential handicaps to the formation of an independent economic setup. Resilience to external shocks should be increased. Yet, for this, Türkiye’s competitive advantage should be increased, together with industrial transformation. The value added to exports should continue to increase. Financial deepening is also an important and critical priority for an independent Türkiye.
One thing is for sure, despite seldom financial volatilities, it is predominantly the dynamic Turkish economy, focus on creating a production economy and the entrepreneurial spirit of the Turkish businesses that drives high growth rates in Türkiye. Thanks to this persistent dynamism and striving mindset, the manufacturing industry, exports and industrial production are all still sturdy.
Export-led manufacturing and industrial production policies, just as in the earlier examples of the Asian tigers such as South Korea or Taiwan, could indeed be the solution to the current growth dilemma (rising exports and increasing deficits). It should also be the new engine of Turkish economic recovery and the country’s path to prosperity, rather than the low-quality construction industry.
Türkiye’s commercial and business dynamism and strength, its strategic position for the trade between the East and the West, its relatively bigger entrepreneurial spirit, its increasing role as an energy hub, young and large population and a huge domestic market (fostering and fueling an entrepreneurial mindset) are all noteworthy strengths of the Turkish economy.
The Turkish banking and manufacturing sectors such as the white goods, capital goods, auto industry, military hardware, UAVs and ships are already at European standards. The first national electric vehicle (TOGG), naval ships, “KAAN” combat aircraft and drones are all leading a new transformation wave in the Turkish economy and its defense industry.
Strong consumer demand is currently still helping the economy, but that cannot be sustainable. It should be replaced with international demand. Even so, consumer spending and domestic demand have been huge positive factors in the Turkish economy in the past few years. The young population, immigration waves and tourism have all played a crucial role in this positive trend.
Producers, especially those that have costs in lira and revenues in reserve currencies are well-off. Thus, the recent Turkish lira depreciation and high inflation have been a huge stimulus or boost for these exporting Turkish companies.
Time to harvest the fruit
Türkiye has been on a long structural and economic transformation path, and it needed huge external finances as its own finances or domestic savings were limited. This has even led to occasional financial instabilities. Public-private partnerships have helped the country finance part of these investments. Even central bank financing was used effectively.
A critical point is that most foreign exchange reserves consuming huge investments, including a national electric vehicle, a nuclear power reactor, energy investments, large-scale infrastructure investments, the defense industry, and even health and education investments, are all almost complete or already realized.
Hence, it is time, now, for Türkiye to get paid back and harvest the fruits of all these megaprojects. The country could rebuild its foreign exchange reserves, achieve exchange rate and price stability, and even a current account surplus. Massive defense exports, auto and other high-tech exports, energy independence, and over $100 billion (TL 1.96 trillion) in tourism, will all help Türkiye minimize its current account deficit and achieve long-stalled financial stability.