IMF Survey : Turkey: Increasing Saving to Reduce Vulnerabilities

IMF News, December 20, 2013

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Turkey’s economy holds much promise due to geographical location, young population, and a vibrant private sector.
To join high-income countries, Turkey must make the economy more competitive and reduce its external deficit.

Growth accelerated to 3.7 percent in the first half of 2013, supported by successive interest rate reductions and increased public sector infrastructure spending.
Good performance in the first 5 months of the year and an investment credit upgrade provided ample external financing.
Market sentiment shifted in late May 2013 with fears of U.S. Federal Reserve tapering: currency depreciation, higher interest rates, tightened financing conditions, and subsequent slowdown.
Despite turbulence, Turkey was likely to experience growth of close to 4 percent in 2013, but with a deteriorating external account and higher-than-desirable inflation.

Private sector savings has fallen significantly over the last 15 years, contributing to a low domestic savings rate and a large external deficit.
Key statistics:
- Required investment to sustain 4 percent growth: close to 21 percent of GDP.
- Domestic savings rate: about 14 percent of GDP.
- Saving deficit to be filled by external financing: about 7 percent of GDP.
- Target domestic savings to sustain high growth and reduce external financing dependence: about 18 percent of GDP.
External financing that fills the saving deficit often takes the form of volatile portfolio inflows or short-term borrowing.

Monetary framework aims to maintain price and financial stability and discourage volatility in short-term capital inflows.
The framework has not allowed the central bank to meet its inflation target of 5 percent.
Complexity of the framework complicates communication and expectation management; reduced policy uncertainty and gradual tightening are expected to help steer inflation expectations lower.
Turkey needs a tighter monetary and fiscal stance to ensure a decline in the current account deficit and inflation.
Overall balance sheets are generally sound and provide buffers against plausible growth and exchange rate shocks from Fed normalization, but the external imbalance requires careful policy calibration.

No single reform suffices; priorities must be sequenced to address competitiveness and increase domestic savings.
Critical structural areas:
- Labor market reforms.
- Education reforms to boost human capital.
- Strengthening the business environment and improving labor market functioning.
These reforms should help attract more foreign direct investment and support a shift toward high-value added manufacturing and services.

Short-term: Central bank should continue normalizing monetary policy to guard against volatility and support short-term stability.
Medium-term macro priority: Government should increase domestic savings; the public sector must play a larger role to raise savings toward about 18 percent of GDP.
Complementary actions:
- Tighten fiscal policy alongside monetary normalization.
- Pursue structural reforms (labor market, education, business environment) to improve competitiveness and attract FDI.
Objective: Achieve a sophisticated economy based on high-value added activities that produces continued rises in incomes, jobs, and standards of living while reducing dependence on volatile external financing.

Source: IMF Survey: Turkey: Increasing Saving to Reduce Vulnerabilities (December 20, 2013).