Turkey’s economy has continued its recovery in the first half of 2017 after growth bounced back in the last quarter of 2016 and was similarly robust in the first quarter, Moody’s Investors Service announced on Wednesday.

“As a result, we have raised our 2017 growth forecast to 3.7 percent from 2.6 percent. We expect growth in 2018 to average 3.2 percent,” Moody’s said.

The Turkish economy grew five percent in the first quarter of this year, compared with the January-March 2016 period; the government had targeted a growth rate of 4.4 percent by the end of the year.

Over the past three years, the country’s economy expanded 5.2 percent in 2014, 6.1 percent in 2015 and 2.9 percent in 2016.

As stated in the company’s August update on Global Macroeconomic Outlook, Moody’s revised its 2017 growth forecasts for eight countries on account of “stronger growth performance in the first half of the year”.

“We have raised our real GDP growth projections for China, Japan, France, Germany Italy, Korea, Mexico and Turkey,” Moody’s said, noting that the global economy continues to maintain solid momentum.

“With clear signs that the expansion is likely to be sustained through 2018 in these countries, we have also raised our growth projections for next year,” it added.

In June, the World Bank also raised its 2017 growth forecast for Turkey to 3.5 percent from 3 percent while the OECD’s growth forecast was 3.4 percent.

Factors of recovery

Moody’s said that available high-frequency indicators so far have shown a stronger-than-expected performance driven by factors such as a rebound in tourism from Russia and Israel, and government stimulus measures such as tax cuts and a credit guarantee scheme.

Earlier this year, the Turkish government reduced a 6.7 percent special consumption tax on white goods to zero, and lowered the 18 percent VAT on furniture to eight percent for a specific time period, in a bid to support domestic demand.

In March, the government also introduced a new framework for a credit guarantee fund (CGF), which aims to help small and medium-sized enterprises obtain credit via banks by providing the Treasury with guarantees for losses from possible non-performing loans.

“…A rise in exports due to improved price competitiveness and strong demand from the EU, somewhat lower tensions domestically after the April referendum,” Moody’s added.

Moody’s also stated that the Turkish lira had largely stabilized after a steep depreciation late last year and in early 2017 and net exports were supportive to growth, with exports expanding by more than 10 percent, while imports declined.

One dollar traded for 3.4520 Turkish liras at 5 p.m. local time (1400GMT) on Wednesday; the exchange rate climbed to an historic high in mid-January this year of 3.94.

According to Turkish Central Bank data, the dollar/lira rate was 3.02 on average last year; one dollar traded for 2.71 Turkish liras on average in 2015.

Stimulus measures should continue 

Moody’s said it is unlikely that this year’s pace of growth can be maintained into 2018 as government stimulus measures are withdrawn.

“Some of the measures, such as the tax cuts on durables and furniture, which benefitted consumer spending, and the postponement of social security payments by companies from the first quarter of this year to the last, should expire in the second half of this year,” the company suggested.

“At the same time, the credit guarantee fund facility, which provided the credit support to the economy, is expiring given that its funds are almost entirely used,” it said, adding:

“We also expect persistently high inflation to erode household purchasing power, which will continue to put pressure on the central bank to raise policy rates.”

Last month, Turkey’s annual inflation rate dropped to 9.79 percent, which was the lowest level in six months, down from 10.9 percent in June.

Turkey’s Central Bank did not change the policy rate, known as the one-week repo rate, of 8 percent at its last monetary policy committee meeting on July 27.