Lira depreciation, high interest rates will continue to dampen consumption and investment
The EBRD expects gradual recovery in the Turkish economy in 2020 after the start of a recession at the end of last year which should result in economic contraction in 2019.
In its latest economic outlook, the EBRD says the lira’s depreciation and high interest rates will continue to dampen consumption and investment, although exports could make a positive contribution to growth.
Private sector debt reduction -- or deleveraging -- means that the economic recovery will be slower than in past crises, when credit growth stimulated recovery.
After growing by 2.6 per cent in 2018, a contraction of around 1.0 per cent is expected in 2019, while 2020 will likely see a gradual recovery of growth to around 2.5 per cent.
The EBRD report says leading indicators suggest that the slowdown may have bottomed out in the first quarter of 2019, but adds this may in part be a result of temporary counter-cyclical measures introduced before municipal elections in March 2019.
Despite a stabilisation of the lira in the wake of high volatility in 2018, the currency remains highly vulnerable to fragile investor sentiment.
Inflation in Turkey is expected to remain high for the first half of 2019 after hitting a 15-year peak of 25 per cent in October 2018. Inflation is likely to start to decline gradually in the second half of 2019 as the impact of last year’s lira depreciation recedes.
The economic slowdown and weakness of the lira have led to concerns about bank asset quality and capitalisation.