Time for a low profile on economic targets

Mustafa Sönmez -Hürriyet Daily News, October/19/2015

A combination of political uncertainty and economic fragility in Turkey, as well as unstable circumstances externally, has forced Ankara’s economic targets for the 2016-2018 period to be reduced to a more modest level.
The 2016-2018 version of the Medium Term Program (OVP), which has to be prepared every year by law, was released by the Development Ministry and printed in the Official Gazette. The OVP is an elementary document that determines the basic macroeconomic indicators for the entire public sector and which associates policies with planning, programming and budgeting. Thus, the process of preparing the central administration budget begins with the cabinet accepting the OVP.

Those who drafted the plan have noted “There may be the need for certain updates in this OVP covering the 2016 through 2018 period before the new government to be formed after the Nov. 1 general elections sends the 2016 central administration budget to the parliament.” 

New targets

Without forgetting this reservation, when the 2016 OVP targets are reviewed, it can be said that there is quite a deviation from the targets set for 2015. Starting with growth, other targets in inflation and unemployment have not been reached, whereas in the current account deficit, there is a “recovery” coming from low growth, which is the only good news.

The new OVP states that the growth target which was set at 4 percent for 2015, will now be 3 percent. Given the fact that the growth in the past quarter was not particularly good, even 3 percent is an optimistic estimate.

The OVP used to define the national income with current prices over the dollar exchange rate and the 2015 target was set at $850 billion. But in the new OVP, instead of the dollar in current prices, the “dollar according to purchase power parity” has been used. This makes it difficult for the target to be met. However, the new OVP is hinting at the national income in dollars, in the ratio of the current account deficit to the national income. According to the OVP, the current account deficit will be $36.7 billion, while its rate to the national income will be 5.2 percent.

Then we understand that the unexposed national income is $706 billion… This means a drop of 12 percent of the $802 billion gross domestic product calculated for 2014. Again, this is what is not openly being said in the OVP: While the income per capita in dollars was $10,557 in 2014, it will drop down to $9,086 in 2015, calculated in terms of the population growth.

Inflation and unemployment are two other targets that were not met in 2015. The OVP hopes that consumer inflation will be 7.1 percent at the end of the year. Even if this becomes true, it will be above the 6.3 percent target. It was claimed that unemployment would not reach 10 percent in 2015 and would remain at 9.9 percent but the new OVP states that it will be 10.5 percent.

It looks as if low growth will bring a lower than targeted current account deficit. Instead of the $46 billion deficit expected, at the end of 2015, the deficit is estimated to be $36.7 billion. This will mean that the current account deficit ratio to GDP will go down to 5.2 percent.

Emerging countries 

“The global economy has been recovering since the 2008 crisis,” the new OVP states. “However, this recovery varies from country to country. With the Fed getting closer to making rate increases, a slowdown in China, a drop in commodity prices, increased financial fluctuations, falling global demand, weak capital inflows and a weakening of national currencies of emerging markets, all of these increase the downward risks, especially for emerging economies. Together with increasing geopolitical risks, these developments restrict global growth expectations for the next term… While the cost of international financing for developing countries has increased, commodity prices have remained low, which have negatively affected economic growth in several developing countries. Since the first months of 2015, several developing countries led by China, Russia and Brasil have opted for rate changes one after the other to provide financial stability.”

The current economic situation in emerging countries is expected to worsen according to the new OVP.

Reflections of Turkey 

The new OVP states that the GDP in the first half of 2015 increased 3.1 percent. It said they expected growth based on domestic demand to continue in the second half as well, while international demand will continue to negatively affect economic growth. Under these developments and expectations, the GDP is expected to increase about 3 percent in 2015.

What about 2015 growth? The OVP is setting a 4 percent growth target for next year while pulling down 1 point from the previous target of 5 percent. This target can only be met with domestic demand, it said.

The new OVP opts for low targets but it is unclear that the necessary external resource inflow will occur for this growth target. It is a huge question mark as to how this 4 percent growth will be achieved without the arrival of any foreign resources.

Unemployment and inflation 

Will the 4 percent growth projected for 2016 pull down unemployment? We see that the unemployment target set is still a two-digit one, no lower than 2015’s 10.5 percent.

What about inflation? The OVP said the annual consumer price index as of September 2015 was 7.9 percent. It is expected to be 7.6 percent at the end of the year. It will be 6.5 percent in 2016.

The new OVP sets optimistic targets for the lowering of the current account deficit. It projects an increase in exports, a decrease in imports and the foreign trade deficit to go down to $66 billion in 2016 and the current deficit in tourism and other incomes to go down to $36 billion. Thus, the ratio of the current account deficit to national income is expected to drop to 4.9 percent.

Open to revisions 

Medium-term programs are prepared every year by law, targets are revised and new targets are set. The medium-term program prepared for 2016-2018 said the new government to be formed after the Nov. 1 elections may revise the targets. Thus, the document printed in the Official Gazette is open to a renewal of targets.

The medium-term program is a meaningful document, especially in terms of foreign investors because they want to see where the country is heading and with which policies it will achieve its targets.

Of course, both domestic economic and political developments and events in the international world may increase or decrease the chances of the targets to be achieved – or not – in the plan.

Everything is yet to occur and be seen. It is not easy to achieve the targets but one has to have some targets.