Turkey Economic Outlook:Interview with Scope Ratings and TD Securities

Dennis Shen is a macroeconomist and director of sovereign ratings at Scope Ratings based in Berlin, Germany. Before he joined Scope in 2017, Dennis was European economist with Alliance Bernstein in London. Dennis graduated from the MPA in International Development from the LSE in 2013 and completed undergraduate studies at Cornell University.

Cristian Maggio provides strategy on emerging market economies and financial markets. In 2010, Cristian joined TD Securities from Credit Suisse, where he worked for four years. He holds a Master of Business Administration from MIP School of Management in Milan, as well as a Bachelor and Masters Degree in Economics & Business Administration from the University of Verona in Italy.

  • FE: What is your outlook for monetary policy in light of the reshuffling of the Central Bank leadership?

DS: Looser monetary policies are expected under new Central Bank chief, Sahap Kavcioglu. The intention will be to bring rates lower from the present 19% as sought by President Erdogan. However, given an increase in inflation last month to a very elevated 16.2%, the exact timing and pace that Kavcioglu will be able to achieve an aimed looser monetary policy is unclear given market instability if he acts too abruptly. It is not a given that the Central Bank cuts rates in April; however, if Kavcioglu goes overly long over the forthcoming period without easing rates substantively and raising credit growth, his position as governor could conversely come under growing scrutiny in the president’s eyes. A combination of a gradually loosened policy rate, types of capital controls (such as impeding the ability to short the lira) and FX reserves being used to slow lira depreciation appears probable.

CM: There is still lots of confusion around what the new CBRT governor will decide to do. It is only logical to expect him to reverse recent monetary tightening, otherwise Agbal’s sacking would make no sense. Therefore, our most up to date expectation is to see easing coming through. As far as our official forecasts are concerned, we expect 400bps of easing in the current quarter (Q2 2021), followed by another 300bps down in Q3. We however expect that the CBRT will have to reverse course of action later this year and hike again to above current levels.

  • FE: How do you expect the lira to perform going forward?

​DS: The lira has depreciated on average 17% against the dollar per year since 2015. We expect the lira to continue this recent record of structural depreciation, and, if anything, at a potentially more rapid rate over future years as the Turkish economy has become growingly prone to crisis. As Turkey’s economy dollarises, each percent of lira depreciation weakens to a greater extent the capacity of public- and private-sector issuers to service their foreign-currency debts.

CM: The lira will remain extremely volatile, but we expect it to depreciate to 8.50 to the USD in Q2, 8.85 in Q3 and 9.75 in Q4. After hikes are delivered, we expect the lira to regain some strength but remain weaker than current levels.


  • FE: What do you make of Erdogan’s pledge to implement economic reforms?

DS: Erdogan and the president’s surrogates have made statements aimed at succouring markets via communication of sustainable policy intentions. Unfortunately, such pledges have historically not been met with sufficient or even consistent policy actions. Instead, actions have been underscored by the president’s brand of economics—including his faith that high rates cause inflation and not the reverse. It is difficult currently to see how structural deterioration in Turkish fundamentals will be reversed with Erdogan remaining at the helm.

CM: I expect all the reform promises to be smoke and mirrors. We do not expect anything that would reverse the current political trajectory towards less predictable and less effective government policies, more concentration of power and a significantly less liberal state overall.

  • FE: Do you see the country experiencing a banking and/or corporate debt crisis going forward?

DS: To date, due to exceptional policy support activated over this crisis, NPLs have remained modest—of only 4.1% as of January 2021, having declined from 5.2% pre-crisis as of February 2020. While Turkey’s banking and corporate sectors have demonstrated resilience during the space of this Covid-19 crisis in view of exceptional policy support given, were a more significant lira crisis to develop and growth to deteriorate in the future, the banking and corporate sectors’ resilience could be tested. As the sovereign’s health depends increasingly on the health of the Turkish banking system for support in financing and provision of foreign currency, any Turkish banking crisis could quickly transition into a sovereign crisis.

CM: It is a material risk, but we see no imminence of this. A corporate crisis is more likely than a banking crisis in our opinion.

  • FE: What is the outlook for Turkey’s credit rating?

DS: The recent weakening of Turkey’s monetary and economic governance is credit negative […]. Nonetheless, Turkey still holds substantive credit strengths in relation to the repayment of its sovereign debt; as an example, Turkey still has moderate levels of public debt and a resilient banking system. But areas of credit resilience are being eroded.

CM: Stable or lower depending on whether sanctions are imposed by the U.S. and other NATO countries, and the EU, on contentious issues such as S-400, East Med drilling and civil liberties at home.

  • FE: Do you see dollarization continuing in the coming years? If so, what risks does this present?

​DS: Certainly yes—based on economic mismanagement and associated lira volatility, the resident sector of Turkey has sought to hold its deposits in foreign currency. Resident FX deposits held at domestic banks fell after Agbal’s dismissal but still remain near all-time highs at USD 199bn as of 22 March. In addition, the sovereign is increasingly financing itself in domestic markets via borrowings in foreign currency. Moreover, as the lira depreciates, this has automatic dollarisation effects as foreign- currency assets and liabilities increase in comparative value when redenominated under lira terms. This means in the end the Turkish economy is increasingly at risk of a significant balance- of-payment crisis as foreign-currency exposures increase in weight, foreign-currency defenses are used and the lira retains annual structural depreciation trends.

CM: Yes, we think the economy will continue to dollarize. The main risks this presents are 1) declining effectiveness of monetary policy (hence risk of permanent rise in inflation), and 2) absence of lenders of last resort, given the small (in fact, even negative) net amount held in reserves by the Central Bank.

  • FE: Do you see snap elections occurring in the near term, or will the current government serve out its full term?

​DS: Erdogan is already in full campaign mode […]. The conditions for snap elections being called rest upon Erdogan feeling that the conditions are ripe for him to hold onto power under any such early election scenario. Presently, it would appear imprudent to hold elections immediately but were polling to change as Erdogan seeks to first engineer higher growth and appeal to far- right elements, or, alternatively, if the president is successful in eliminating his political rivals from standing in presidential and parliamentary elections, the possibility for a snap election could increase.

CM: It’s a possibility given the risks that Erdogan and his party and allies may continue losing support in the coming months or years. I still consider an early election a great gamble, even for the president. However, a quick and sharp easing cycle could be a sign that early elections are more likely, as they would prep the ground for some short-term support from voters.

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