December 27, 2019 / 10:44 AM / a month ago

Breakingviews - Turkey set for good year before economic reckoning

Turkish President Tayyip Erdogan makes a speech during a ceremony marking the second anniversary of the attempted coup at the Presidential Palace in Ankara, Turkey, July 15, 2018.

LONDON (Reuters Breakingviews) - Turkey will enjoy a reprieve from economic turbulence in 2020. There will be more government spending and interest rate cuts to ensure the economy gets somewhere close to President Tayyip Erdogan’s growth target of 5% for the year. Yet inflation may well remain under control. The reckoning will come later.

The government’s growth goal appears punchy at first glance given the economy is expected to grow at a tenth of that rate in 2019. But the economy will have tailwinds. First, Murat Uysal, who was appointed the head of the central bank in July, is proving more amenable to monetary easing than his predecessor. He has already cut the main policy rate by 12 percentage points between July and December to 12%. More rate reductions are likely in the coming year. Public spending will also play its part with the government expecting to run a budget deficit of 2.9% of GDP in 2020 and 2021.

Expansionary policies may push up consumer prices, which rose 11% in November from a year earlier. Even so, the relative stability of the lira means that inflation will be less than half of its 2018 peaks. Inflation surged to almost 25% that year as steep falls in the local currency pushed up the price of imported goods. But tactics such as foreign exchange curbs and state banks withholding lira liquidity helped the currency hold its ground in 2019, even in the face of geopolitical drama. These defences will probably continue to be deployed.

Vulnerabilities may, however, gradually build up over the course of the next 12 months. State banks are lumbered with non-performing loans and Turkish companies’ foreign-currency exposure is sizable with almost $180 billion more in liabilities than assets as of September. Meanwhile, investors suspect that official reserves have been flattered by the use of swaps and that the central bank’s efforts to support the lira have taken a bigger toll on the foreign-currency war chest than the public numbers suggest. If strategies to support the lira start becoming less effective, the central bank will be forced to reverse some of its easing. Given he is seeking re-election in 2023, Erdogan’s short-term pursuit of growth at any price may backfire.

This is a Breakingviews prediction for 2020. To see more of our predictions, click here: bit.ly/353N6Xg

Breakingviews

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