Current EBRD forecast for Turkey’s Real GDP Growth in 2019 -0.2%
Current EBRD forecast for Turkey’s Real GDP Growth in 2020 2.5%
The Turkish economy exited recession at the beginning of 2019, as the policy tightening that had ushered in a recession during the second half of 2018 gave way to stimulus in the period before the municipal elections. Leading indicators suggest that some of this momentum has subsequently been sustained.
At the same time, there has been a significant improvement in macroeconomic stability. The current account evolved from a deficit of 6.5 per cent of GDP in mid-2018 to record a small surplus by mid-2019, largely driven by import compression linked to the sharp slowdown in the economy. This adjustment, combined with a supportive global backdrop as central banks in advanced economies moved into easing mode, and the failure of several geopolitical concerns to materialise, helped bring some stability to the lira. The stabilisation of the lira, combined with high real policy rates and the impact of base effects, have resulted in a sharp decline in inflation in recent months. A substantial rate hike and consequent sharp slowing of the economy helped bring down inflation from its 15-year high of 25 per cent in October 2018 to single-digit levels in September 2019. The central bank has cut rates significantly, by a total of 1,000 basis points since August, but it needs to moderate the pace of future rate cuts in order to avoid a resurgence of inflation.
The municipal elections saw a significant loosening of fiscal policy, and the recent release of the latest New Economic Programme has relaxed deficit targets for 2019 and 2020, now foreseeing a budget deficit of 2.9 per cent of GDP in both 2019 and 2020, significantly higher than the previously forecast 1.8 per cent. Although public finances are robust, with a low public debt of around 30 per cent of GDP, the long-term impact of growing contingent liabilities in the form of revenue guarantees to public-private partnership projects and credit guarantees under the Credit Guarantee Fund is unknown.
The risk of a banking crisis has eased with the stabilisation of the lira. Bank capitalisation is adequate, helped by capital-raising exercises conducted by several banks. However, asset-quality issues are holding back private banks from lending, despite several government schemes that seek to restart the credit cycle in order to boost growth. In response to this problem, the banking regulator recently introduced measures requiring banks to recognise problem assets that will increase the ratio of non-performing loans to around 6.3 per cent. But a more wide-ranging response is needed to deal with the issue.
Despite some stabilisation in recent months, the economic situation remains fragile. The response to Turkey’s recent incursion into Syria serves as a reminder that geopolitical tensions are never far from the surface. With reserves remaining low and external financing requirements still high, despite the current-account rebalancing, such tensions can have a significant impact on the economy. Recovery from the ongoing slowdown is likely to be gradual. A contraction of around 0.2 per cent is expected in 2019 and the economy should return to a growth rate of 2.5 per cent in 2020, although given the unpredictable domestic and geopolitical environment, significant uncertainty remains around this forecast.