Turkey’s growth raising challenge

ANKARA – Turkey hopes to raise growth while reining in inflation in 2008, but economists say the government’s current reform plans are insufficient to achieve this at a time of tighter credit in global markets. The government has vowed to shake up the social security system and labor markets and to boost aid for research and development, but analysts say these reforms will have a positive fiscal effect on a slowing economy only in the long term. Drought, high energy prices and political wrangling ahead of parliamentary elections in 2007 trimmed Turkey’s gross national product growth rate to just 2 percent in the third quarter. One government minister said 2007 was a «wasted year» for reforms. «Growth will be the most important economic indicator in the next five years instead of public finances. Growth of 4 percent will worsen unemployment and stoke social and even ethnic tensions,» said Pelin Yenigun Dilek, chief economist at Garanti Bank. Turkey has a fast-growing young population and its big cities are surrounded by large shanty towns built by rural migrants, often from the impoverished, mainly Kurdish southeast. The government has set a 5.5 percent target for gross national product growth in 2008, below an average 7.4 percent over the past four years. It hopes social security reforms, increased labor market flexibility and privatizations will help underpin this target, but business groups and economists are not entirely convinced. «This is a 15-year plan and it will not have a serious positive impact in the short term. General health insurance will create an extra burden on the budget in the coming three to five years,» said Gulay Elif Girgin, an economist at Oyak Investment. The government plans a gradual increase in the retirement age and has also included a general healthcare program for all citizens to avert protests over the reform plan. Business groups also fret that the deterioration in economic indicators may worsen as global liquidity becomes more scarce. «Improvements in inflation, the budget deficit, the current account deficit and debt dynamics have stopped. The improvements have gone into reverse in some areas,» Erdal Karamercan, a member of Turkey’s top business forum TUSIAD, said last month. Turkey may have difficulty financing its growth because of scarce liquidity in international markets, he said. The pro-business Justice and Development Party (AKP) government will also probably fail to meet a 2007 growth target of 5 percent. Inflation is also hovering at more than twice its end-2007 target. «I don’t think we can see 5.5 percent (for 2008). This figure is too ambitious. We predict it to come in at 5 percent,» said Oyak Investment economist Gulay Girgin. Economy Minister Mehmet Simsek said the government would speed up its privatization program in 2008 after data showed Turkey will likely fall short of its target of $25 billion in foreign direct investment in 2007. Economists agree that privatizations could help growth. «Even if prices are not as high as in past privatizations, there will be interest. There is serious money in the Middle East and Turkey is one of the markets (Arab investors) like and they want to invest in non-oil sectors,» said Girgin. The government is not considering revising its economic program targets at present, an official said, adding that the final quarter of 2007 could still change the overall picture. «The final-quarter growth figures may be very high. There are examples of this in the past. We still expect a growth figure of around 7 percent in the final quarter,» said the official, who declined to be named. He said data showed the economy had already started recovering in late 2007. «There was uncertainty and worries due to elections but now these have disappeared and the economy has started to recover. Our growth targets are certainly within reach,» he said.