February 3, 2017
PRESS OFFICER: Wiktor Krzyzanowski
Phone: +1 202 623-7100Email: MEDIA@IMF.org
Participants:
Antonio Spilimbergo, Assistant Director, European Department
Wiktor Krzyzanowski, Senior Communications Officer, Communications Department
Mr. Krzyzanowski: Good morning and good afternoon everybody. My name is Wiktor Krzyzanowski and I’m with the IMF Communications Department. Thank you very much for joining us today for this conference call on Turkey Article IV consultation, which also included the financial sector stability assessment. This call is on the record and will be embargoed until 11 am Washington, D.C. time which is 7 pm in Turkey. You would have seen the documents, that is the staff reports for the Article IV consultation and the financial sector stability assessment. Those documents are also embargoed until 11 am Washington, D.C. and 7 pm Ankara time. I will now turn over to Antonio Spilimbergo, who is the IMF Mission Chief for Turkey.
Mr. Spilimbergo: Thank you very much. As my colleague Wiktor Krzyzanowski said, this consultation comprised of a standard Article IV consultation and the Financial Sector Assessment Program, which is conducted every five years in conjunction with the World Bank and is focusing on financial issue with an in depth analysis.
Turning to Turkey: There are few things which are important to notice. First, growth has been slowing considerably in 2016. In 2015 growth was 6.1 percent, in 2016 it will be well below 3 percent. The Staff Report says 2.7 percent, but it was finalized in November 2016 and discussed in December. Given the latest information, we know probably that growth would be lower, closer to 2 percent in 2016.
Why has the growth slowed down considerably? There is a set of pre-existing weaknesses, which include the high current account deficit, which according to the old GDP number was 4.5 percent of GDP in 2016 and with a new GDP number it is closer to 3.7 percent. This high current account deficit results also in the dependency of Turkey on foreign capital, which is a reason for fragility. Second, there is high inflation, which has been a problem for Turkey for several years. Third, you have the especially large FX denominated debt in normal nonfinancial corporates amounting to $280 billion. Finally, there are some structural issues, which include low labor force participation and weak productivity growth.
In addition to these pre-existing weaknesses, the uncertainty has increased greatly in 2016. As you know, starting in December 2015, tension with Russia rose. There was a slowdown in tourism from Russia. And a series of terrorist attacks also decreased the tourist arrival from Western Europe especially. This accounted for the loss of about 1 percent of GDP in 2016. You have also weak investment and finally consumer uncertainty increase, which affected consumption.
Despite all these weaknesses, the economy has shown some resiliency, as in the past. And, there are two reasons for this resiliency: one is a strong fiscal position. Debt to GDP ratio is just about 29 percent following the GDP review. Also, despite the slowdown, the deficit has been quite contained: with the new GDP number, is about 2.2 percent of GDP. Second, the reason for resiliency is that bank capital remains high, which provides an important buffer.
What are the overarching goals given this situation? First, we think that it is very important to avoid an excessive slowdown of the economy. As I mentioned, the economy grew 6.1 percent in 2015, this year less than 3 percent, and this slowdown could have a serious effect on the debt burden.
Second, it is important to address long-term weaknesses, including external imbalances and reducing inflation.
What are the staff recommendations? First, to avoid the excessive slowdown, you have recommended some moderate fiscal loosening. We recommend a fiscal loosening of about half percentage point of GDP for 2017. This is in line with the government’s plan. Second, as regards to monetary policy, taking into account large depreciation of the Lira, we think that a tightening of monetary policy is necessary at this stage to avoid further volatility of the exchange rate, which could to be damaging, given the preexisting weaknesses I was talking about before. We think that this tightening should happen explicitly and not by reducing liquidity without changing the policy rate change.
Another issue is macroprudential policy, which should be used to ensure soundness of the financial system and should not only be used to stimulate domestic demand.
Finally, structural reform should focus on increasing private domestic savings and improving the business climate. These are the main highlights.
Mr. Krzyzanowski: Thank you very much Antonio and we are now ready to answer questions.
Questioner: You have your forecast for this year and next and you also recommend a moderate fiscal expansion to counter this cyclical downturn in the Turkish economy. I was curious of your views on how much of a growth boost do you think the Turkish economy can sort of provide to GDP and how much of that is really part of your optimal scenario. Because earlier today we heard from the Finance Minister that 2 percentage points could come from government spending, alone speaking of 2017. Do you consider this to be excessive or in line with your own optimal scenario?
Mr. Spilimbergo: We do recommend a fiscal stimulus in the magnitude of 0.5 percent of GDP. This size was calculated also looking at the subsidies to the employers for the increase in minimum wage. The minimum wage was increased by 30 percent in 2016 and the government gave some subsidies to employers in 2016. This year, the government decided to prolong these subsidies. This was very useful to avoid a cost shock to companies.
We do not envision at this time the need for a larger fiscal stimulus. Because at the end of the day, one has to keep in mind the long-term objective to achieve a rebalancing of the economy that should be more driven by export than by internal demand. So even though fiscal policy could be useful for the immediate term – for a limited period – to avoid an excessive slowdown. We don’t envision a bigger use of fiscal policy. Especially because, as we all know, it is very difficult to reverse fiscal measures in the medium term, so we do not recommend it.
Mr. Krzyzanowski: Thank you very much. If there are no further questions, we will conclude. The transcript of the call will be on the IMF website and the documents will also be published on the IMF website at 11 am Washington, D.C. time, 7 pm Ankara time.
