Turkey Referendum Result Could Scare Off Investors

President Recep Tayyip Erdogan has built much of his political success on the back of a strong Turkish economy. But GDP and tourism are down and some investors fear Sunday’s referendum win could mean a less positive economic outlook.

Turkey’s economic development played an important role in the debate over controversial plans to change the constitution. Sunday’s referendum win will usher in the introduction of a presidential system, DW reported.

But what will that mean for the economy?

Erdogan owes his success largely to the strong growth of the Turkish economy in the past decade, but recent economic news has been less positive.

Turkish GDP rose by 2.9% last year, far short of the 6% in 2015. The reason given for this was a slump in the tourism industry due to the attempted coup in the summer of 2016, and several terror attacks blamed on militant Kurds and Islamists. The tourism sector is an important source of income for Turkey and contributes around 5% to the Turkish GDP. Last year, revenues in this sector fell by almost 30%.

Analysts had expected even lower growth in view of the political upheaval and economic problems. But private consumption, which has been promoted significantly by the government since the failed coup, has proved to be an economic stimulus. Private consumption rose sharply in the fourth quarter, by 5.7%.

In addition, the Turkish statistical office has revised its calculations, making the latest growth figures appear more favorable. Still, investment remained weak last year and exports declined.

In 2017, economic growth is expected to be similar. However, the forecasts of the Turkish government and international organizations are inconsistent. While the European Commission, the International Monetary Fund and the World Bank expect an increase of between 2.5 and 3%, government representatives expect GDP to grow by 4-4.5%.

Inflation has risen to its highest level for more than eight years. Consumer prices rose by 11.29% in March compared with that in the previous month. This was the highest level since October 2008.

  Unrealistic Scenario

Economic growth of just under 3% is not sufficient to reduce unemployment--currently 11%--and reach the ambitious development targets set for 2023. As before, the Turkish government is aiming for an economic output of $2 trillion and an export volume of $500 billion by 2023.

For this, the Turkish economy would have to grow between 7 and 8% annually—an unrealistic scenario in view of the persisting structural weakness in the manufacturing sector and the high dependence on imports to meet the technological demands of industry, particularly the energy sector.

Foreign direct investment fell by 31% last year to around $12 billion. In order to finance economic growth, Turkey is heavily dependent on capital imports. However, more direct investment requires political stability and a reliable legal framework.

  $3.7b Budget Deficit in Q1

The Turkish government ran a budget deficit of 19.5 billion Turkish liras ($5.32 billion) in March, and 14.9 billion liras ($3.7 billion) in the first quarter, according to the finance minister on Monday.

“Turkish government revenues in the first three months stood at 144.7 billion Turkish liras ($39.5 billion), marking a 9.9% rise year-on-year, while budget expenditures were 159.7 billion Turkish liras ($43.6 billion), an increase of 21.3% compared with the same period last year,” Naci Agbal said, Anadolu Agency reported.

According to the ministry, tax revenues rose 12% during the first three months to 121.6 billion liras ($33.2 billion). The government’s expenditures for health, pensions, and welfare were up by almost 43% between January and March to 38.2 billion liras ($10.4 billion) over the same period last year, while personnel expenditures increased by 8.4%, reaching almost 42 billion liras ($11.5 billion).

Interest expenditures stood at 18.8 billion liras ($5.12 billion) over the same period, corresponding to an increase of 14.3%.

In March, budget revenues reached 39.1 billion Turkish liras ($10.7 billion), a 3% fall over the same period last year, while budget expenditures increased by 25% reaching 58.6 billion liras ($16.01 billion).

The government is aiming for a budget deficit of 46.8 billion Turkish liras (nearly $12.8 billion) at the end of the year, according to the finance ministry.