The European Bank for Reconstruction and Development (EBRD) kept its growth forecast for the Turkish economy for this year unchanged, maintaining its earlier projection from May, while expecting the economic growth to pick up next year amid rebalancing and the boost in investor confidence.
The EBRD is expecting Türkiye to grow by 2.7% in 2024, it said in its "Regional Economic Prospects in the EBRD Regions" report, published on Wednesday.
Economic growth is predicted to pick up to 3.0% in 2025, driven by a rebalancing of growth drivers and a boost in investor confidence.
The bank at the same time revised the growth in the EBRD regions for this year and the next, both slightly downward.
"Growth in the EBRD regions is expected at 2.8% in 2024, picking up to 3.5% in 2025. This represents downward revisions relative to the May 2024 forecast (of 0.2 percentage points in 2024 and 0.1 percentage points in 2025) reflecting a weaker outlook for advanced Europe, stagnating mining output in Kazakhstan and Uzbekistan, the ongoing conflict in Gaza and Lebanon and severe droughts in Morocco and Tunisia," it said.
Detailing the growth forecasts according to regions, from Western Balkans to Central Asia, the EBRD said a number of economies in emerging Europe remain dependent on imports of gas and oil from Russia, and average inflation in the EBRD regions declined from its peak in October 2022, although remaining above the pre-pandemic level.
Improving investor confidence
Evaluating Türkiye's economy, the EBRD's report highlights the recent policy changes as well as the country’s removal from the Financial Action Task Force (FATF) gray list in June 2024, as factors that helped improve investor confidence.
Türkiye's monetary and fiscal policies have been tightened since June last year, with the objective of bringing inflation down, the bank recalled in the report, adding that the policies were maintained despite the local elections in March.
The Central Bank of the Republic of Türkiye (CBRT) hiked its key rate by a cumulative 4,150 basis points between June 2023 and March 2024 and "used sterilization tools to tighten the monetary stance further and enhanced the monetary policy transmission by implementing macroprudential measures," the report said.
Furthermore, it highlighted steps such as the public savings and efficiency package, announced in May, and no mid-year minimum wage hike as additional steps to support disinflation and reduce the fiscal deficit.
Türkiye’s credit default swap premium also declined significantly over the last year, the EBRD said, citing a drop from 700 basis points in May 2023 to below 300 basis points. It also said that more major rating agencies upgraded Türkiye’s sovereign ratings.
At the same time, it referred to the notable decline in the FX-protected accounts (so-called KKM) compared to August last year.
The external position has also improved, the bank said. "The 12-month cumulative current account deficit declined steadily to $19.1 billion in July 2024, from the peak of $57 billion in May 2023," it stated. It said that lower imports of goods and strong tourism receipts played a role in this.
The report, however, identifies key risks in the Turkish economy, namely persistently high inflation, the impact of the real appreciation of the Turkish lira on exports and tourism, high geopolitical tensions in the region and tight global financing conditions given the extensive short-term external financing needs.
In 2023, the EBRD invested a record 2.5 billion euros ($2.79 billion) in Türkiye, with more than half going to projects supporting the country’s green transition.
The EBRD is among Türkiye’s key investors, with more than 20 billion euros invested through 453 projects and trade finance limits since 2009, most of which was in the private sector.