Prospective free-trade-area partner Turkey entering a recession

12.03.2019

It was recently reported in the press that, according to Turkey’s foreign minister Mevlüt Çavuşoğlu, Turkey and Ukraine would probably shortly sign an agreement on a free trade area.

The countries started creating this area back in 2012, and Turkish President Recep Erdoğan (in office since 2014) stated that the talks would be completed by the end of 2018. However, they failed to do this apparently because of a crisis in Turkey, reports UkrAgroConsult.

An economic boom began in Turkey in 2010. Although real GDP growth followed a V-shaped trend, its pace in single years was faster than, for instance, in China, the EU and developing economies.

The robust economic growth was based on available credits. The interest rate of Turkey’s Central Bank stayed at 5-7% until the middle of 2018. Its low level reflected President Erdogan’s vision: he believed this was a basis for a healthy, rapidly developing economy.

From 2010 till 2018, the number of annually granted loans increased almost fivefold: from 0.5 Ml to 2.7 Ml, respectively. Consumer loans were one of the most significant segments of growth. They accounted for some 4% of Turkey’s economy in 2002, but this percentage has increased to 18% over recent years. The loans were taken by residents mostly in national currency and sourced largely from an inflow of short-term portfolio investments from abroad. 

This period witnessed a rise in construction because of easy real-estate loans and increasing production volumes.

A set of circumstances, including foreign geopolitical factors, caused sharp devaluation of the Turkish lira in 2018 (almost by half), an inflation hike (to some 20%), and pushed up unemployment (to 11%).

The country faced difficulties trying to service its debts and simultaneously maintain domestic expenditures. The government was forced to toughen its monetary policy and introduce austerity measures.  

Turkey entered 2019 with financial problems, growth in living costs, export constraints caused by U.S. restrictions, and declining trust of investors.

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