Economics & Growth | Emerging Markets | Europe | FX | Monetary Policy & Inflation
– Turkey is targeting a return to fast growth this year, but without reigniting the high inflation and macro imbalances of the past. The 5% growth target looks broadly achievable, risks are instead skewed towards inflation, fiscal and the C/A, particularly if the revival in credit growth continues.
– The lira is likely to remain relatively stable due to ongoing CBRT intervention. Further measured rate cuts may still be in the pipeline.
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– Turkey is targeting a return to fast growth this year, but without reigniting the high inflation and macro imbalances of the past. The 5% growth target looks broadly achievable, risks are instead skewed towards inflation, fiscal and the C/A, particularly if the revival in credit growth continues.
– The lira is likely to remain relatively stable due to ongoing CBRT intervention. Further measured rate cuts may still be in the pipeline.
Economic Recovery Continued Through Q4
A strong end to 2019 should set the Turkish economy up for a returm to more dynamic growth this year. We expect the economy continued to gain momentum in Q4, with GDP growth projected at 4-5% YoY, the fastest pace since Q2 2018. With the economy contracting through the first half of 2019, full-year growth looks set to come in around just 0.5%.
The recovery in economic growth, despite still-high non-performing loans, was mainly due to foreign demand with exports remaining strong until the final months of 2019. A recovery in lending, led by public banks, supported the domestic recovery. The central bank, banking regulator and economy ministry also helped revive growth with the reserve requirement implementation and other measures.
A Stable Lira, Helped by the CBRT
A relatively stable currency through 2019 aided the economic recovery. A significantly improved C/A – on the back of import compresion during the late 2018/ early 2019 recession – reduced Turkey’s fx funding needs. Limits imposed on swap transactions with foreigers and state banks, and CBRT intervention in the FX market were also significant factors behind lira stability.
The combination of weak domestic demand, exchange rate stability and favourable base effects helped inflation drop back to single-digits by September. Although inflation climbed back to 11.8% by year-end this was a significant improvement versus the 25% peak in October 2018 and allowed the CBRT to deliver sizable and front-loaded rate cuts. The central bank has now cut the policy rate by 12.75 percentage points over five consecutive meetings since last year leaving the one-week repo rate at 11.25%.
Turkey’s increased state intervention in markets last year (for example food price controls and direct state selling of foodstuffs in early 2019) resulted in a widening budget deficit. On the revenue side, the main contribution came from profit and reserve fund transfers from the CBRT. The resulting increase in the domestic borrowing requirement did not, however, lead to higher domestic interest rates, given the the focus on Turkey’s FX-denominated and short-term borrowing.
Achieving Growth Without Imbalances Looks Unlikely
This year will be critical for Turkey. Any return to the credit-fuelled growth of the past will jeopardise the improvement in inflation and the C/A deficit, and risk pressure on the lira.
The current domestic demand-led growth dynamic will make this difficult. As will still-supportive monetary and fiscal policies. Alongside the recovery in financial conditions, the CBRT’s loose macro-prudential policies and public-supported loan packages have boosted – and may further boost – loan supply and demand. And given this has largely been focused on consumer loans, rising domestic demand could well reverse the significant improvement in the C/A deficit. The weakness in global growth also warrants caution on exports, albeit offset to some extent by a more competitive currency than in the past.
We expect GDP growth of around 3% this year, undershooting the government’s 5% target. Risks to growth are, however, distinctly to the upside assuming that the revival in loan growth seen in Q4 is sustained. And even without a significant boost from credit the fact that monetary and fiscal policies will remain supportive points to risks on inflation, the current account and the budget deficit, rather than growth.
More Rate Cuts to Come… and More FX Intervention
The MPC noted in its January statement: “At this point, the current monetary policy stance remains consistent with the projected disinflation path.” While this message is perceived to imply a hiatus on rate cuts following a string of sizable cuts, earlier statements by the economy ministry and the President, the retreat in public banks’ loan rates to single-digits; and swap money market pricing, suggest that further measured cuts may still be on the horizon if conditions allow.
Furthermore, we expect the budget deficit to remain elevated on account of sustained support to growth from fiscal policy and an increase in interest expenditures. One-off revenue sources, led by CBRT profits, will continue to be exploited. Expect more measures aimed at ensuring exchange rate stability – in both directions.
Haluk Bürümcekçi is the Founder & CEO of Bürümcekçi Research & Consulting, which specialises in the Turkish economy and the political landscape. Prior to this, Bürümcekçi was the Executive VP & Chief Economist at Burgan Securities, specialising in monetary policy and economic activity, and the Chief Economist at Fortis Bank, where he also covered market strategy.
(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)