Confoundingly complacent
We take a quick look at economic developments in our by-now familiar Q&A format.
Growth forecasts for this year and beyond, which appear appallingly unfazed by wars, viruses and reserve losses, continue to look highly complacent to us. Never mind the strong headlines, underlying growth dynamics do not look particularly strong, either.
Inflation edged up further to 12.4% in February, from 12.2% in January and a low of 8.6% in October, with stickiness continuing. Recent currency weakness, which is likely to continue, should complicate the outlook further. The CBRT keeps ignoring all this, however, telling us we are heading toward 8.2% inflation by yearend, basically to justify further rate cuts. At this moment, we expect another 25-50 bps cut of the policy rate at this month’s MPC meeting.
The lira has been quite volatile again lately, weakening somewhat, despite significant intervention by state banks. Rather than dollarization though, current account deficits combined with portfolio outflows seem to be driving F/X demand this time.
A remarkable current account adjustment notwithstanding, the financing side of the balance of payments was pitifully weak last year, with total inflows amounting to a meager 0.4% of GDP. This is quite sobering, considering the fact that 2019 was a “good” year from Turkey’s perspective, with Trump cushioning Turkey against potential sanctions, and the Fed cutting rates three times.
We are watching the recent central bank action, including most notably Fed’s 50 bps cut yesterday evening, but in any event, we do not see inflows picking up materially this year under the circumstances. This begs the question of how credit growth can be sustained in the absence of inflows and/or how Turkey will be able to finance a sizable current account deficit, if it were to emerge.
After ending last year with a whopping 5-5.5% of GDP deficit, excluding one-off revenues, the central government budget has had a relatively encouraging start into this year. But this year’s deficit target of just under 3% of GDP, which envisages adjustment through spending restraint, is highly unlikely to be achieved, given, inter alia, the need to boost growth, rising military expenditures associated with Turkey’s involvement in Syria, and the time bomb associated with some of the PPP projects.
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