Turkey is determined to curb inflation and trim a yawning current account deficit that widened in the first months of the year, Turalay Kenc, deputy governor at the Central Bank of the Republic of Turkey, told Emerging Markets.
Kenc said fighting inflation was “one of our two core priorities.”
“Our objective is to bring [Turkey’s] CPI down to around 5.3% by the end of the year. We are confident we can hit that target,” he said. Consumer prices rose by 6.13% year-on-year in April, down from 7.29% the previous month, but analysts said they are likely to increase further.
The more pressing concern is the current account deficit. Turkey’s “5-5-5” plan – a long-term effort to cut inflation and the deficit to 5% while boosting gross domestic product (GDP) by the same percentage – is only partially working. The current account deficit widened to 6.2% of GDP at end-February 2013, from 5.9% at the end of last year.
Kenc voiced concern, noting that “while it would be very nice to bring [the deficit] down to 5%”, that sort of target doesn’t “look likely” in the near-term.
Turkey’s deficit disorder stems largely from the cost of securing oil and gas: the country imports 97% of its energy, mostly from Russia.
Timothy Ash, head of emerging market research ex-Africa at Standard Bank, said that Turkey spent $55 billion on energy imports in 2012, or 5% of GDP. Achieving energy sustainability, in other words, would also balance the budget.
To offset that burden, Turkey signed a $22 billion deal last Friday with a Franco-Japanese consortium to build the country’s second nuclear power plant. A third plant is likely to given the green light in the coming months. “There is one [plant] still pending,” said Kenc. “These are important deals, necessary” to create a sustainably balanced economy, he added.
Last November Fitch, the rating agency, upgraded Turkey to investment grade. Senior financial figures in Istanbul contacted this week by Emerging Markets said Moody’s was likely to raise Turkey’s credit rating to investment grade before the year is out, with S&P following after.
On Wednesday Hans Blommestein, head of the OECD’s bond market and public debt management unit, said he could see “[no] reason that would block more rating upgrades” in Turkey.
Underlying economic growth is also on the rise again. GDP grew by just 2.2% in 2012, down from 8.5% the previous year, though the European Commission recently raised its 2013 growth forecast on the economy to 3.2% from 3%, and its 2014 forecast to 4% from 3.8%.
Kenc said the economy was likely to grow by at least 3% this year. Structural issues remain, the deputy central bank governor admitted, but he said that Turkey was “well on the way to addressing them. We have a good population dynamics and good productivity prospects. We have done a lot to get a solid legal and financial infrastructure in place and ready for the future.”
Standard Bank’s Ash added: “This is a very vibrant long-term economic growth story, with good demographics, strong public finances, good banks and a stable government.”
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CORRECTION: A previous version of this story incorrectly stated that Turkey's inflation target for the end of the year is 6.2%. It is in fact 5.3%. This version also corrects the 2011 economic growth rate to 8.5%.