Turkey

WHILE Europe was beleaguered by the debt crisis, Turkey’s economy has flourished in 2010. The country saw increases in exports and tourist revenues while attracted $22 billion of foreign direct investment during that year. Debt owed to the International Monetary Fund dropped from $23.5 billion in 2002 to $6 billion last year, reducing the country’s external debt pressure. GDP grew by an estimated 6.8 per cent which is significantly better than 2009 when it contracted by five per cent. Though inflation and unemployment rates remained high, they retreated from the preceding year to around eight and ten per cent in 2010.

Domestic consumption is still going to be very strong, and this will give Turkish manufacturers leverage for growth. Construction and international contracting are going to be strong in the 2011. There is room for growth in this area, and it is increasing its share in the Turkish economy. The economy is expected to slowdown in 2011. The Turkish government has targeted an economic growth of 4.5 for this year, five in 2012 and 5.5 per cent in 2013. With a GDP of $730 billion, Turkey is the 16th largest economy in the world and 6th largest economy compared to the EU area in 2009 also 15th most attractive destination for foreign direct investment.

The year 2011 will be the key for new investments to overcome the structural problems of the economy. International economic circles expected a major inflow of foreign direct investments into Turkey. The main challenges remain the sticky inflation, which is expected to end the year at seven per cent, and the deteriorating external balances. Turkish export markets are not expected to show a very strong recovery in 2011. New markets that Turkey has been targeting over the course of last decade are going to be critical for Turkish exporters. However, Turkey will be the second-largest economy in Europe by 2050.

The Turkish authorities have announced that both fiscal and monetary policy will be tightened gradually. Turkey’s public debt is expected to moderate as a share of GDP. According to the IMF, Turkey’s external debt is expected to rise to 52.4 per cent of GDP by 2015. This will be on account of a moderate widening of the current account deficit, somewhat slower average GDP growth than prior to the crisis, and a gradual increase in debt-creating inflows, although partly offset by increasing FDI and equity inflows. For 2011, Turkey’s GDP growth is likely to be underpinned by private consumption-on account of low real interest rates, restocking, and, to a lesser extent, exports.

Spain

SPAIN will experience slow economic growth in 2011 but the pace should pick up in 2012. Banco Bilbao Vizcaya Argentaria (BBVA), Spain’s 2nd largest bank, predicts that the economy would expand by 0.9 this year and grow by 1.9 per cent in 2012. The bank expected the economic recovery would have a positive effect on Spain’s 4.2 million jobless people and the country’s unemployment rate would drop to 20.6 this year and 20.1 per cent by the end of 2012. The forecast is more optimistic than the bank’s previous predictions, but still lower than the 1.3 per cent predicted by the government for this year. The IMF expected Spain’s GNP to rise by 0.6 per cent in 2011.

The Spanish economy, the European Union’s fifth biggest, slumped into recession during the second half of 2008 as the global financial meltdown compounded the collapse of a labour-intensive construction boom. It emerged with tepid growth of just 0.1 in the first quarter of 2010 and 0.2 in the second but then stalled with zero growth in the third. Madrid estimates 70 per cent of the two million jobs which were lost in Spain since the start of the economic downturn were directly or indirectly related to the construction sector.

Spain’s annual inflation rate hit a two-year high of three per cent in January. Higher food, soft drink and electricity prices pushed up the cost of living, driving inflation up from a 2.9 rate in December. It was the highest inflation rate since October 2008 when prices climbed 3.6 per cent annually. The jobless rate had surged to a 13-year record above 20% at the end of 2010, the highest in the industrialized world. It exceeded the government’s target of 19.4 for the year. After posting a jobless rate of 18.8 in 2009 and 20.33 per cent in 2010, the government is forecasting 19.3 for 2011 and 17.5 per cent in 2012. Spain appears to be stuck in a rut of staggeringly high levels of unemployment.

BBVA believed the government would succeed with its policy of fiscal consolidation, bringing the country’s fiscal deficit to six per cent this year and to 4.5 next year. Some 100,000 net new jobs will be created in Spain in the second half of 2011 but the unemployment rate will remain above 20 per cent at least until 2013. Wages in Spain will rise this year at levels below the current rate of inflation. The average pay rise in January 2011 was 2.98 per cent. That was slightly below the rate of inflation of 3.3 per cent predicted for the first month of the year.

Spain’s Treasury had managed to cut borrowing from markets in 2010 and would do so again in 2011 because of austerity measures adopted by the government. For the year ahead, the Treasury estimated net financing needs of €47.2 billion - a decline of 24% from 2010. But the figure was slightly higher than previously announced because of the country’s €3.588 billion contribution to a European financial rescue for Greece. Net bond issues in 2010 amounted to €62.1 billion, compared to the €76.8m forecast at the start of the year. It was a sharp decline from the €116.7 billion in net bond issues for 2009.

Spain’s public debt rose to a 10-year record while bad debt at its banks struck a 14-year high. The public debt rose 16.3% to €611 billion in the third quarter (equivalent to 57.7 per cent of GDP), its highest proportion since 2000. The figure is still below the limit of 60 per cent of GDP imposed on European Union members but it is up from the 53.2 posted at the end of 2009. Adding to concerns over the country’s finances was the Spanish lenders’ non-performing loans ratio which rose to 5.66% in October 2010, its highest level since January 1996. Total bad debt held by Spanish banks rose to €103.7 billion in October as property-related losses mounted.

Greece

GREECE aims to cut its budget deficit to about three billion euros in 2015 from nearly 17 billion this year. The plan is more ambitious than past projections. The IMF forecast that the deficit would amount to about 2 percent of gross domestic product in 2015. That would mean above four billion euros if calculated based on forecasts for 2011 GDP, or more if the economy returns to growth as planned in 2012. The deficit will be reduced by two-thirds from spending cuts. The programme does not include additional cuts in salaries and pensions and no tax hikes. To achieve the plan target, Greece is eyeing revenues from real estate assets and by closing some public organisations.

The government has already cut public sector wages, frozen pensions, raised taxes and started reforms to open up its economy to more competition, as agreed with the EU and the IMF last year in return for the bailout. If the Greek economy stayed at current levels of about 230 billion euros, the government’s new target would mean that the deficit would stand at 1.3 per cent of GDP in 2015.Greece’s recession began in the last quarter of 2008. It exacerbated last year by austerity moves implemented in exchange for a 110 billion-euro ($150 billion) bailout from the European Union and the International Monetary Fund. The economy contracted by an estimated 4.2 per cent in 2010 and is forecast to shrink three per cent in 2011.

Greece’s housing industry suffered one of its worst years since the Second World War in 2010, contributing to the economic recession. The residential property market has been one of the major pillars of Greek GDP growth for decades, surpassing in importance other euro-zone countries with the exception of Ireland and Spain in some aspects in the last few years. The sector has contributed more than 0.5 of a percentage point annually to GDP from 1998 through 2007 and even approached 0.9 of a point if one takes into effect positive spillover effects to other sectors and the positive wealth effects from rising prices.Unfortunately, the outlook is not good this year, raising concerns about the length and the depth of the adjustment in the industry and its impact on the economy. It is hard to see how private residential activity will rebound this year and house prices will stop declining with the supply overhang and economic and financing conditions becoming even more restrictive. This means one of the main pillars of past Greek GDP growth will continue to be a drag on the economy in 2011, hurting consumer and business confidence. 2011 looks set to be another dismal year for the local residential property market and this should be a concern to planners given its importance to the economy.

Greece’s economic and fiscal performance under the EU-IMF program has in many respects exceeded expectations, its heavy public debt burden renders fiscal solvency highly vulnerable to adverse shocks. A swift resolution of the debt crisis would bring great relief. If bond spreads were immediately to revert to historical norms, rather than in 2015 and beyond, the Greek budget deficit would improve by 10 per cent of GDP by 2014. The cost to the Greek taxpayer of the loss of confidence in government debt is estimated to be about 10 cents on the euro.