Turkey’s Economy Expected to Fall Short of Growth Targets for Next Two Years as Tourism Declines: Reuters Poll

By Seda Sezer

ISTANBUL – Economists participating in a recent poll indicate that Turkey is set to fall short of the government’s economic growth projections for both this year and the next. The anticipated growth rates are 3.5 percent for both years, which is below the government’s forecasts of 4.5 percent for 2016 and 5.0 percent for 2017.

Turkey’s GDP had previously shown resilience, growing by an unexpected 4 percent in 2015 and 4.8 percent in the first quarter of 2016. However, the tourism sector has been significantly affected this year due to escalating tensions with Russia and a series of bombings that have led to a decline in tourist arrivals. Economists estimate that tourism revenue could decrease by approximately $8 billion in 2016, which represents about 1 percent of the GDP.

The lira hit a historic low following President Tayyip Erdogan’s announcement of a three-month state of emergency, a situation that economists believe could further jeopardize tourism revenue.

Deputy Prime Minister Mehmet Simsek highlighted potential increases in Turkey’s external borrowing costs and an escalation of existing risks, attributing these concerns to the coup attempt that occurred recently.

"There are several factors contributing to the anticipated slowdown: a decline in tourism and rising financing costs for companies with foreign exchange debts due to the lira’s depreciation," commented Deniz Cicek, an economist at Finansbank.

Additionally, Cicek mentioned that a global economic slowdown, along with the aftereffects of Brexit on the EU, could negatively influence Turkey’s trade and growth. He suggested that the coup attempt might aggravate this slowdown by raising external financing costs and further affecting tourism.

Turkey’s heavy reliance on imports to meet its growing energy demands, coupled with a dependence on tourism to offset its current account deficit—reported at over $32 billion in 2015 (approximately 4.5 percent of GDP)—poses additional challenges. The number of foreign tourists visiting Turkey saw a decline of more than one-third in May, marking the largest drop in at least 22 years.

Relations with Russia remain strained, particularly regarding the Syrian crisis and a prior incident in which Turkey shot down a Russian fighter jet last November, despite recent agreements to resume bilateral cooperation.

Economist William Jackson from Capital Economics noted, "Anticipated interest rate hikes in the U.S. may lead to more challenging external financing conditions, further depreciating the lira. The recent events are likely to dampen growth, negatively impacting consumer and investment confidence in the short term."

He warned that longer-term implications could hinder investment and productivity growth. Although forecasts remain unchanged for now, he acknowledged that risks are currently skewed to the downside.

While inflation has been on a downward trend, the central bank has cautioned that it may experience a short-term spike due to fluctuations in prices of unprocessed food and tobacco. As of June, consumer prices had increased by 7.64 percent year-on-year. Economists predict inflation rates of 7.8 percent for 2016 and 7.5 percent for 2017, while the government’s targets are set at 7.5 percent and 6 percent, respectively.

Simsek also attributed inflationary risks to currency depreciation and noted that Turkey has consistently failed to meet its inflation targets for the past five years. The lira depreciated by 20 percent against the dollar last year, exacerbated by rising food prices.