Events came to a head in mid-August, when Donald Trump’s announcement that the U.S. would double metal tariffs sent the currency into freefall. The crisis provoked a belated response from the authorities: The Central Bank jacked interest rates up to an eye-watering 24% and the new finance minister pledged fiscal discipline.
This tighter policy stance has stopped the lira’s rot, with the currency trading in the TRY 5.0-5.5 range against the USD in recent months. Moreover, economic imbalances have narrowed sharply; the authorities appear to have finally broken the back of inflation, while the current account racked up four consecutive surpluses to November.
Nevertheless, the effect of the currency crash and higher interest rates on economic activity has been chilling. The economy likely contracted in Q4, and high-frequency indicators such as retail sales, industrial production and unemployment make for grim reading.
To discuss what is in store for the economy this year, we spoke to Maya Senussi, senior economist for the Middle East at Oxford Economics.
Maya is responsible for developing views on the Middle East, including forecasting and monitoring the Turkish and GCC economies. She joined Oxford Economics having spent seven years working as a senior economist covering Emerging EMEA at Roubini Global Economics (RGE). Prior to joining RGE, Maya took on several research roles, including project work for Control Risks (Dubai and London) AKE Group, Middle East Consultants International and the Embassy of the Republic of Poland in Damascus. She is a graduate of King’s College London, where she earned a master’s degree in international peace and security, with a focus on contemporary security issues in the Middle East. She also holds a bachelor’s degree with honors in Arabic and politics from the School of Oriental and African Studies, University of London.
Last year was a tumultuous year for the Turkish lira. How do you see the currency evolving during 2019? What will be the main drivers behind the currency’s evolution?
The Turkish lira (TRY) has stabilised in the 5.20-5.40 range versus the USD and, while it is almost 30% weaker than at the start of 2018, it’s been relatively resilient in recent weeks. Granted, the monetary policy stance has remained tight and the chances of premature easing by the central bank (CBRT) have receded, but we see little scope for TRY appreciation from current levels amid persistently high inflation and volatile policy.
Do you see the government keeping to its promise to tighten fiscal policy? Will the upcoming regional elections impact government spending?
The authorities have so far stuck to the fiscal roadmap and steered clear of traditional vote-buying measures. With elections still almost two months away, and to get people to vote (there are many undecided voters), it might become impossible to resist some form of giveaways and some slippage is possible.
Is Turkey’s current economic model, based heavily on capital accumulation, sustainable? If not, what more does Turkey need to do to boost the sustainability of growth?
The model has already proven to be unsustainable and it will take some time for the economy to shake off the effects of the crisis. But despite public pledges, the government’s inclination to embrace reform doesn’t strike as convincing and a re-think of the model is probably not going to happen. It is too early to be talking about a meaningful recovery, but the likelihood is the government will continue to favour certain sectors (construction and infrastructure) as key pillars of economic policy and drivers of investment and demand.
Which economic sectors could Turkey develop in order to diversify its economy?
Turkey’s made a lot of progress in diversifying the economy with investments across a wide range of sectors including telecoms, tourism, food, healthcare, financial services and others, but the progress has stalled in recent years, not least because of uncertain governance. This will hinder the attractiveness for FDI despite the advantages of the growing labour force and the large domestic market that tend to draw in investment.
Do you see any progress being made this year on updating Turkey’s customs arrangement with the EU?
The two sides acknowledge the need to update the current arrangement but there is little to suggest they’ll be making much headway in negotiations this year. The EU has foremost the Brexit distraction to contend with as well as the parliamentary elections, so renegotiating the framework isn’t top priority at this point in time. After Brexit is finalised, there might be an opportunity to come back to the negotiating table.
How do you see inflation evolving this year? What will be the main drivers?
The disinflation process in underway, amid the very tight monetary conditions, but inflation remains elevated, at above 20%. The fading impact of past exchange rate depreciation will extend the disinflation trend but with high food prices, we expect inflation to remain above 20% into Q2, reinforced by the recent increase in the minimum wage. Assuming a broadly stable lira over the next few months, prices should decelerate more rapidly in H2, supported by base effects.
How do you see GDP evolving this year? Will the economy recover from last year’s currency crisis?
The most painful phase of the economic adjustment may be behind us but Turkey’s economy continues to suffer. The Q4 GDP growth print, not due for another few weeks, will confirm that the country slipped into recession in H2 2018, driven by the collapse in domestic demand. While activity should begin to recover in sequential q/q terms in Q2 2019, our view is that overall GDP growth will contract by 1.4% this year, following an estimated average expansion of 2.9% in 2018.
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