Turkey’s economy, which grew by a stellar 8.5 percent last year, will manage to achieve a soft landing this year despite rising external risks such as the euro zone debt crisis, the country’s finance minister Mehmet Simsek told CNBC on Tuesday.
Last year, the country's economic growth was second among G20 nations only to China. A soft landing in line with ongoing rebalancing efforts, Simsek said, is “well underway”.
“The global backdrop isn’t very favorable, but we think it’s doable,” Simsek told "European Closing Bell" in an interview on the sidelines of the World Economic Forum on the Middle East, North Africa and Eurasia in Istanbul.
A chief risk for Turkey is the ongoing weakness in the euro zone, where a further deterioration could quickly have an impact on the $772 billion economy, the eighth-largest in Europe. Despite attempts to diversify away in the past few years, Europe still constitutes over 40 percent of Turkey’s global exports and remains a vital source of foreign investment.
“So what can you do? Of course we had been hoping that European leaders would get their act together, you know, firewalls, and prevent this credit crisis from spreading but unfortunately they haven't been successful so far. The situation looks pretty bad,” he Simsek said.
He also acknowledged the recent economic data from other emerging markets pointing to a slowdown could weigh on Turkish economic growth.
Simsek feels strongly that Turkey’s solid economic fundamentals will help it maintain a level of resilience, particularly in light of its low debt-to-gross domestic product ratio, as well as a “healthy” balance sheet and banking sector.
Current Account Gap Problem
But rating agencies have long cited Turkey’s current account deficit, which in 2011 came in at close to 10 percent of GDP and was the highest among G20 member states, as a key weakness.
Concerns about terms of trade and external demand pushed Standard & Poor’s to cut its outlook for Turkey’s long-term foreign and local currency credit ratings from positive to stable in May. The NATO member has largely relied on short-term capital flows to fund the deficit, and therefore is more vulnerable to external shocks than some of its emerging market peers.
It remains a “rough spot”, Simsek explained, but added that he was confident fundamental reforms to push Turkey up the value chain would ultimately resolve the issue. That also meant more spending on education and infrastructure.
“For this year, domestic demand moderation and some softening in commodity prices have already helped a big reduction in the current account deficit. So the deficit is likely to trend down to seven percent this year. It's still a high number but it's a lot more manageable,” Simsek, who took on the top job at the Ministry of Finance in 2009, told CNBC.
Figures on Monday showed inflation in Turkey, a net energy importer, easing to 8.3 percent in May, from 11.5 percent a month earlier. Simsek said that the combination of a relatively strong lira with soft commodity prices would mean it could soften further, but warned it would be a volatile ride.
Meanwhile, the long-sought EU membership was still on the table and Simsek underscored that the country wanted to remain firmly anchored to Europe. The application was formally submitted back in 1987, but negotiations did not start until 2005. Progress in several contentious accession chapters has been slow since, and analysts have repeatedly argued this was pushing Turkish policymakers to orient themselves more towards the East.
“We want to use Europe as a pretext for a wholesale economic political and social transformation in this country. It’s all about reforms. It’s not about handouts. It’s not about economic failures,” Simsek said.
The country’s local currency, a popular carry trade with some investors, lost 18 percent against the U.S. dollar last year. It has weakened further over the last four weeks, pushed down by euro zone jitters.
Yousef Gamal El-Din is CNBC's Middle East Correspondent and contributes to the channel’s flagship shows, as well as analysis for CNBC.com.
Stay in touch with him on Twitter at http://www.twitter.com/youseftv @youseftv