Turkey’s growth forecast gets a shave from OECD

Turkey cannot remain immune to the global slowdown, said the Organization for Economic Cooperation and Development, or OECD, estimating that growth next year will be far less than government targets.

Releasing its biannual economic outlook yesterday, the Paris-based organization painted a dark picture of the Turkish economy, highlighting the "twin troubles" of weak domestic demand and the global downturn.

"Growth is expected to decline to 1.6 percent in 2009 before recovering to 4.25 percent in 2010, in line with the global recovery," the OECD estimated.

The $665 billion economy may expand at a 4.2 percent rate in 2010 as the global credit crunch subsides, the report said. The economy will probably expand 3.3 percent this year, it said.

Taking note of the high current account deficit Ğ expected to reach $50 billion at the end of the year Ğ the organization also said the volatility of the exchange rate is another serious problem. The Turkish lira has lost more than 35 percent against the U.S. dollar since Jan.1.

Investor confidence the key
Under such circumstances, supporting investor confidence is "crucial," said the report. To this end, the government should opt for "fuller fiscal transparency and credible spending rules." If "systemic liquidity risks" emerge in the financial system, the government should be "prepared to introduce contingency support mechanisms to preserve the hard-won stability of the financial sector," the report said.

The OECD listed the main problems of the economy as weakening domestic demand, inflation, slow employment growth, a large current account deficit and stability of the financial system, linked to investor confidence. The deficit is projected to reach 6.5 percent of gross domestic product at the end of the year, the report said, partly due to decreasing capital inflows due to global financial strains.

In a thinly veiled criticism of the Central Bank, the report said the rise of interest rates as a result of monetary policy tightening [in the first half of the year] and higher risk premia in the deteriorating international environment has "dampened" domestic demand.

"Market share losses due to competition from other countries and real currency appreciation resulted in large job losses in labor-intensive sectors such as textiles," the report said.

Second-round effects of inflation persist
Noting that inflation has receded due to lower energy and food costs, the OECD said "second-round effects" still persist. The organization forecast a rise in the consumer price index of 10.3 percent this year, 8.3 percent in 2009 and 7.6 percent in 2010.

In the first half of 2008, the unemployment rate edged up to 9 percent, the report noted.

Analyzing the effects of the global turmoil, the report noted that the "sovereign risk premium has increased" considerably.

"As Turkey continues to depend on foreign capital to finance its large external deficit and to roll over its external debt, accessing foreign resources may become more difficult and costly," the organization said. "Supporting investor confidence, therefore, will be crucial. The authorities should monitor closely the impacts of increased exchange and interest-rate volatility on the stability of the financial system, and be ready to phase in adequate contingency support mechanisms to offset any emerging systemic risks."

The most recent gage on confidence, the manufacturing confidence index for November, posted a big decline, as the index fell to 54.6 points from 69.2 in October.