Although there may be a short-term correction as the global stock market rally pauses for breath, optimism remains in the medium to long term as the country continues to emerge as a regional economic power.
The Turkish economy remained resilient to the global economic downturns witnessed in recent years, benefiting from low levels of public and household debt, favourable demographics and a solid and profitable banking industry.
After posting strong GDP growth rates of 9% in 2010 and 8.5% in 2011, Turkey’s growth rate is expected to moderate to 3.6% in 2012, according to the latest survey of consensus expectations released by Central Bank of Turkey (CBT). This would represent a soft landing rather than a return to the boom and bust periods that the Turkish economy typically experienced in the 1990s.
Additionally, the country remains somewhat insulated from the economic crisis in Europe. Although Europe is a major export destination, Turkey managed to increase its export performance by gaining market share across EU markets where demand for cheaper quality products has increased.
Another important factor behind the strong export performance was Turkey’s increasing penetration to MENA countries on the back of strengthening political and economic ties with the region.
Being highly dependent on imports of energy and raw materials, the Turkish economy has also benefited from easing oil and commodity prices.
These combined factors have helped to reduce the sizable current account deficit, which reached 10% of GDP in 2011, while inflation has dropped to 9.1% from double digits in 2011 and is expected to decline further to 6.7% by year-end according to the CBT’s latest survey.
Despite its strong year-to-date performance, the Turkish equity market remains inexpensive, with valuations trading on price earnings ratios of 10x, which is close to both the five-year historical average and the broader emerging market average.
Although the large current account deficit constitutes one of the main risks for the Turkish economy, we remain encouraged by the Government’s recently-introduced incentive scheme to tackle the structural and long-standing current account deficit problem over the long term and also by CBT’s flexible monetary policy over the short term.
