Turkey's economy expected to contract in 2019, face longer recession

Turkish President Recep Tayyip Erdogan, a self-described "enemy" of interest rates, has called on the central bank to lower rates.
Friday 19/04/2019
 Wake-up call. A man reacts as the vendor gives the price for vegetables at market in Ankara, last February. (AFP)
 Wake-up call. A man reacts as the vendor gives the price for vegetables at market in Ankara, last February. (AFP)

ANKARA - Turkey's economy is expected to contract in 2019 after a decade of strong growth and economists are predicting a longer recession ahead after a recent volatility in the lira, a Reuters poll indicated.

The Turkish economy contracted 3% in the fourth quarter of 2018 after a currency crisis devalued the lira nearly 30% against the US dollar. It drove inflation to a 15-year high, severely limited companies' ability to service foreign debt and multiplied bad loans in the banking sector.

The economy is expected to contract 0.3% in 2019, the median of a Reuters poll of 43 economists indicated, well below the government's sharply lowered forecasts of 2.3% growth. There was a wide range of estimates: from growth of 2.3% and contraction of 5%.

Turkey's economy last contracted in 2009, by 4.7%. From 2010-17 its compound growth rate was 6.6% thanks to a construction boom driven by cheap capital following the global financial crisis.

The Turkish economy is expected to contract 3.4% in the first quarter of 2019 and 1.2% in the second before returning to growth of about 2.1% in the third, the poll's median indicated.

The first quarter GDP reading is expected to be published May 31.

The poll suggested that growth is expected to stand at 2.7% in 2020. The International Monetary Fund (IMF) forecast a 2.5% contraction in Turkey this year and 2.5% growth in 2020.

Forecasts in the poll were generally revised down from a similar survey conducted three months ago, displaying a further deterioration in sentiment towards Turkey.

"We expect the economy to return to positive growth zone in the second half of the year," Muammer Komurcuoglu, economist at Is Investment, said of his "soft landing" scenario. "Yet, this recovery is fragile and depends on political and geopolitical developments."

Last year's currency crisis was driven by concerns over the central bank's independence and deteriorating ties between Ankara and Washington.

Confidence remains shaky as the two NATO allies remain at odds over policies in Syria and over Turkey's push to purchase a Russian missile defence system.

Turkish Finance Minister Berat Albayrak announced a reform package April 10 that mainly aims to recapitalise state banks squeezed by large companies restructuring debt.

Analysts said that investor confidence could be restored if such reforms were implemented under the supervision of the International Monetary Fund (IMF), a move Turkey has strongly rejected.

Yet, when asked whether Turkey would seek funding from the IMF or another outside institution, six poll respondents said no. Nor is Turkey expected to have early elections ahead of 2023, when presidential and parliamentary elections are scheduled, five respondents said.

Among Albayrak's reforms were plans to lower inflation, which hit a 15-year high of more than 25% in October. It stood at around 20% in March.

The poll indicated that annual inflation is expected to decline to 17.5% by the end of the second quarter and drop to 15.5% by year-end, in line with government forecasts. It is expected to drop to 11.8% by year-end 2020 and 9.1% by the end of 2021.

The poll also showed the current account deficit, which ballooned last year but has since receded as the economy slowed, is expected to be at 2.4% of the GDP this year, lower than a government forecast and down from 6% in the previous year.

The central bank hiked its policy rate to 24% in September and has left it unchanged since, though some investors said they worry about a premature easing of monetary policy.

Turkish President Recep Tayyip Erdogan, a self-described "enemy" of interest rates, has called on the central bank to lower rates. Central Bank Governor Murat Cetinkaya said its tight monetary stance would be maintained until inflation shows a "convincing improvement."

In a separate poll, economists predicted the Central Bank would gradually lower its key rate to 19.25% by year end, delaying any cuts until around July and ease less aggressively than previously thought.

(Reuters)