Fundamentals vs. Rabbits
A benign global backdrop and massive stimulus measures will produce another year of strong growth, it looks like, but this doesn’t change the discomforting fact that Turkish economy continues to live on borrowed time. Secular growth outlook remains cloudy, while the usual imbalances – a hefty current account deficit, a large external borrowing requirement and near-double digit inflation rates -- suggest that the economy is in need of significant adjustment. But with the presidential and parliamentary elections lined up for November 2019, possibly even earlier as we argue here, growth will continue to have the priority, keeping political pressure for easier policies and hence, the odds of a market backlash along the way, elevated.
We see growth decelerating to around 3% next year after closing this year at around 4.5% (which is now markedly higher than our previous forecast of some 3.5%). Our growth slowdown call is predicated on the continuation of weakness in the institutional environment, an already indebted economy and last but certainly not least, an inevitable weakening of the “credit impulse” after first half’s massive boost thanks to the government guarantee scheme. We think the policy space is also much more limited now -- or that there are no more (fat) rabbits left in the hat to be pulled out.
Imbalances, on the other hand, continue. Inflation is likely to end this year at over 9%, markedly above target (and the Bank’s revised estimate of 8.5%). A wobbly trajectory notwithstanding, it looks unlikely to decelerate to below 8% next year as well. Likewise, the current account deficit should end the year around $38-$39 billion (some 4.7% of GDP), which, according to recent IMF estimates, is substantively “above norm”, while financing is almost purely dominated by portfolio inflows. All this, combined with a difficult political backdrop and no clear trend-reversal in residents’ demand for F/X deposits, prevented the lira from strengthening much, which is not all that surprising.
After an unprecedented deterioration earlier in the year, the central government budget improved somewhat in recent months, largely owing to a relative rebound in revenues. But, with monetary policy forced to stay relatively tight throughout, we think this will prove temporary, with the deficit rising to some 2.5% of GDP this year, from just over 1% last year. It should be difficult to reverse this deterioration next year, though the upcoming Medium Term Program, possibly in October, should provide further clues on how the government sees the budget, as well as the macro outlook.
Our muddle-through baseline notwithstanding, we should brace for volatility ahead because the weakening growth fundamentals on the one hand, and the government’s despair to keep growth at least around 5% ahead of the November 2019 elections, makes the road ahead highly bumpy.
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