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Turkey Politics October 2019

Turkey: Government reveals ambitious economic plan, while geopolitical tensions return to center stage

On 30 September, the government published a new economic program for 2020-2022 with ambitious growth targets, amid escalating geopolitical tensions. Although in late October geopolitical tensions eased somewhat, doubts remain over Turkey’s economic outlook and the government’s high growth aspirations.

The program includes an ambitious growth target of 5.0% for the period. Muhammet Mercan, chief economist at ING Turkey, highlighted that the projections are rather optimistic “given the high levels of corporate sector indebtedness and ongoing deleveraging as well as a challenging global backdrop with increasing uncertainty.” Maya Senussi, senior economist at Oxford Economics, commented that “if anything, in the quest to achieve the ambitious growth rate, there is a meaningful risk that monetary policy is relaxed far too aggressively (influenced by President Erdogan’s unwavering demand for lower interest rates), reinforcing downside risk to sentiment.”

Private consumption and investment will be the key drivers of economic growth, according to the program. However, the program is largely void of concrete plans and policy, and expects that the optimistic 5% growth target will be mostly met due to stronger domestic demand and more stable economic conditions. Moreover, the program envisages a moderate current account deficit for 2020–2022, which seems unlikely as a strong recovery in domestic demand would likely buttress imports. Against this backdrop, the research team at Goldman Sachs noted that “growth will come at the expense of wider imbalances, [which] increases the risk of further TRY volatility” due to the need to attract large sums of foreign capital and keep fiscal policy loose; this is a move away from the 2019-2021 program that tried to keep the fiscal deficit in check.

Given that growth will likely be driven by credit and increased external funding, the government’s inflation targets appear optimistic, and are far lower than FocusEconomics panelists’ projections. A return to single-digit inflation by the end of next year is targeted through some policy adjustment to public wages and administered prices. However, Muhammet Mercan pointed out that “given still elevated forward-looking inflation expectations, sticky service prices and vulnerability to exchange rate movements, the risks are tilted to the upside, as bringing inflation down to target looks challenging.” Goldman Sachs analysts highlighted wage growth as a further upside risk.

Adding to an already strained economic situation, the recent U.S. decision to impose economic sanctions against Turkey and halt negotiations on a trade deal between the two countries heightened volatility in the financial and exchange rate markets. U.S. President Trump authorized punitive measures against Turkey on 14 October following the incursion of the Turkish army in northern Syria. While a ceasefire has since been agreed upon, and Trump proclaimed he would lift all sanctions if the deal is upheld, geopolitical risks remain high and threaten Turkey’s growth perspectives. In short, as summarized by Nomura’s research team, this episode “once again bring[s] to the fore the geopolitical risks that so severely undermined the lira during summer 2018.”

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