Turkish Economy Likely Outperformed Most Peers But at a Cost

Turkey’s economy has continued to grow at a strong pace so far this year, but that doesn’t necessarily mean its citizens are getting richer.

The $717 billion economy likely outperformed all Group of 20 nations except for China in the first quarter after nearly stalling a year ago when the pandemic struck. It’s been bolstered by robust consumption on the back of last year’s government-led credit push, an expansion that came at the expense of price and currency stability.

Data on Monday is likely to show gross domestic product rose 6.3% from a year earlier and 1.3% from the fourth quarter, according to the medians of forecasts in Bloomberg surveys. Treasury and Finance Minister Lutfi Elvan said Thursday that “data point to 6% growth in the first quarter.”

There is an “exchange rate illusion” in Turkey’s economic growth data, according to Enver Erkan, chief economist at Istanbul-based Tera Yatirim, who’s ranked by Bloomberg as the most accurate forecaster on Turkish GDP data.

Noting that the GDP per capita in U.S. dollar terms dropped nearly 40% since 2013 to around $7,700 last year, Erkan said Turkey’s recent economic model isn’t sustainable as the growth is mainly driven by consumption supported by government spending and loan campaigns.

The government pushed banks to ramp up lending to help businesses and consumers ride out last year’s Covid-19 emergency. The credit boom was coupled with a front-loaded easing cycle that helped prime the economy. That growth push weakened the currency by 20% last year and kept headline inflation in double digits. The size of the economy dropped to $717 billion last year from $760.8 billion a year earlier.

The currency further lost 10% against the dollar in the first quarter, especially after President Recep Tayyip Erdogan fired the central bank’s former hawkish governor Naci Agbal in March. The decision to fire Agbal, who had sought to restore the central bank’s credibility, set off a swift reversal of investor enthusiasm, sending Turkish markets into a nosedive.

The data expose the challenge facing new central bank Governor Sahap Kavcioglu as he looks to restore price stability without cooling the economy ahead of the general elections in 2023.

Kavcioglu has pledged policy continuity after his appointment and kept benchmark interest rate unchanged at 19% for a second meeting this month, saying the pace of price gains had peaked in April. Consumer inflation quickened for a seventh month to 17.14% in April.

Bloomberg