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POPULATION

TURKEY 83.6 MILLION

GDP PER CAPITA
C A4
8,610 US$ COUNTRY RISK BUSINESS
ASSESSMENT CLIMATE

SYNTHESIS

MAJOR MACRO ECONOMIC INDICATORS

  2019 2020 2021 (e) 2022 (f)

GDP growth (%) 0.9 1.8 9.8 2.5

Inflation (yearly average, %) 15.2 12.3 19.6 65

Budget balance (% GDP) -2.9 -2.9 -2.5 -4

Current account balance (% GDP) 0.9 -4.9 -2.5 -3.5

Public debt (% GDP) 32.6 39.7 36.5 36.5

(e): Estimate (f): Forecast

STRENGTHS WEAKNESSES

Strong post COVID-19 recovery Dependence on imported energy and

Strategic geographic location, proximity to key intermediate goods
export markets High inflation, local currency hitting record weak
Very diversified manufacturing tissue, strong levels
production knowledge Vulnerability resulting from high level of short-
Young population, educated workforce term private external debt, low level of gross
Narrowing current account deficit international reserves
Renewables account for 53% of Turkey’s total Credit-driven growth performance causing a high
installed power capacity level of debt, overheating risk
Uncertainty over the monetary policy

RISK ASSESSMENT

Worsening inflation outlook amid slower growth in 2022

After growing by a stronger-than-expected 11% in 2021, Turkey’s economy will slow in 2022 mainly on the back of sharp
increases in energy prices and supply disruptions in key commodities due to the war in Ukraine. Turkey imports nearly 30% of
its natural gas from Russia, as well as nearly 20% of metals and chemicals required for its domestic production. Imposition of
Western sanctions on Russia, the removal of some Russian banks from the SWIFT system and the closure of some ports in the
Black Sea region due to the war have affected negatively trade flows between Russia and Turkey. Uncertainties about
payments will deter many companies to trade with Russia. On the other hand, the negative base effect and rising inflationary
tensions will hamper growth performance. The drop in purchasing power of households will weigh on private consumption (60%
of GDP). Due to the heavy sell-off of the Turkish lira in November and December 2021 and globally rising commodity prices,
inflation is expected to hit 70% on an annual basis in May. Pass-through impacts from producer prices, which skyrocketed in
February (+105% YoY), will be a key driver of inflationary pressures. The slowdown in domestic demand will restrain
companies’ ability to pass rising production costs to their clients, leading to lower profit margins. With the front-loaded central
bank rate cuts (500 basis points between September and December 2021), the resulting lira depreciation and cheaper credit,
the authorities will continue to support investment, exports, and employment. The government’s announcement of a new
financial mechanism based on protecting local currency deposits from the lira’s depreciation may shield the lira in the short-
term. However, as the interest rate is limited to three percentage points in addition to the central bank’s policy rate (currently at
14%), the new tool may not be to able offer adequate remuneration to the lira investors compared with inflation. On the other
hand, extremely high inflationary pressures may push the central bank to halt the rate cut cycle in the upcoming period. On the
back of three-year high capacity utilisation rates (78% as of December 2021), machinery and equipment investments seem to
continue after increasing for nine consecutive quarters as of Q4 2021. However, uncertainty resulting from the geopolitical
situation and fragile financial stability are likely to weigh on companies’ decisions in 2022. 
 
Current account deficit to widen again due to the soaring energy bill

Despite benefiting from a weaker lira and diversification of supply chains globally, exports will be affected by the global
stagnation resulting from the impacts of the war in Ukraine. Lower demand in EU markets will weigh on Turkish exports to this
zone (around 40% of total exports), pushing exporters to diversify their key clients towards other markets. Concomitantly, the
import bill will continue to increase due to soaring commodity prices and manufacturers’ willingness to build inventories to
counter supply issues. In January-February 2022, Turkey’s energy imports in 2021 – which represent 93% and 99% of oil and
gas consumption, respectively - jumped to USD 16.8 billion, from USD 5.4 billion a year earlier, according to the International
Energy Agency (IEA). The sharp increase in oil prices will halt the narrowing of the current account deficit. Another important
challenge for Turkey’s economy would be related to the crucial tourism revenues (3% of GDP in 2021). Last year, Turkey
attracted nearly 30 million tourists, out of which 4.7 million were from Russia and 2 million were from Ukraine (in 2019, 45
million tourists came to Turkey, out of which 7 million from Russia and 1.5 million from Ukraine). Given the current situation, it
may be difficult for Turkey to reach the end-2022 tourism revenue forecast of USD 35 billion. This will also contribute to the
widening of the current account deficit. Turkey’s need to attract foreign investments will remain high due to the high short-term
external debt level (as of Q2 2021, gross international reserves covered 77% of short-term external liabilities), which leaves the
economy vulnerable to the volatility in international investors’ sentiment.
 

The public accounts should remain solid, although the government is likely to increase current spending from the second half of
2022, ahead of the presidential election (June 2023), after reducing VAT (from 18% to 8%) on electricity, hygiene products and
medical equipment in March 2022 to counter inflation. The state-proposed protection of savings against lira depreciation may
create a burden on the budget. Nevertheless, the outlook of the public debt should not represent a key risk for Turkey, as it
remains low as a share of GDP. However, it is important to note that rising stocks of FX debt (60% of the total as of early 2022,
compared with 45% in 2018) may represent a source of volatility.
 
Domestic political tensions may increase ahead of elections 

As elections get closer (June 2023), risk of polarisation within the society may increase. However, this should not threaten the
political stability of the country. Recently, moving beyond regional issues of contention, Turkey has restored its relations with the
United Arab Emirates (UAE). In November 2021, both countries signed bilateral cooperation agreements in multiple fields
including trade, energy and environment. According to some media reports, Saudi Arabia, Egypt and Israel have also taken
action to create a new level of relations with Turkey. These improvements are expected to have reciprocal positive economic
contributions.
 
Last updated: March 2022