April 12, 2019 / 11:21 AM / 2 months ago

Turkey's economy to contract in 2019, longer recession ahead

ANKARA (Reuters) - Turkey’s economy is expected to contract in 2019 after a decade of strong growth, and economists are predicting a longer recession ahead after a recent bout of volatility in the lira, a Reuters poll showed on Friday.

FILE PHOTO: A street vendor stands next to his stall in front of a jewellery shop in Istanbul, Turkey, April 11, 2019. REUTERS/Murad Sezer/File Photo

The Turkish economy contracted 3 percent in the fourth quarter of last year after a currency crisis devalued the lira by nearly 30 percent against the dollar. It drove inflation to a 15-year high, severely limited companies’ ability to service foreign debt and multiplied bad loans in the banking sector.

The economy will contract 0.3 percent this year, the median of a Reuters poll of 43 economists showed - well below the government’s sharply lowered forecasts of 2.3 percent growth. There was a wide range of estimates, from growth of 2.3 percent and a contraction of 5.0 percent.

Turkey’s economy last contracted in 2009, by 4.7 percent. From 2010 to 2017 its compound growth rate was 6.6 percent thanks to a construction boom driven by cheap capital following the global financial crisis.

The economy is expected to contract 3.4 percent and 1.2 percent in the first two quarters of 2019, respectively, before returning to growth of about 2.1 percent in the third, according to the poll’s median.

The first quarter GDP reading is expected to be published on May 31.

The poll also showed that growth is expected to stand at 2.7 percent in 2020. The International Monetary Fund this week forecast a 2.5 percent contraction in Turkey this year, and 2.5 percent growth in 2020.

Forecast in Friday’s poll were generally revised down from a similar poll conducted three months ago, displaying a further deterioration in sentiment toward Turkey.

“We expect the economy to return to positive growth zone in the second half of the year,” Muammer Komurcuoglu, economist at Is Investment, said of his “soft landing” scenario. “Yet, this recovery is fragile and depends on political and geopolitical developments.”

THE QUESTION OF REFORMS

Last year’s currency crisis was driven by concerns over the central bank’s independence and deteriorating ties between Ankara and Washington.

Confidence remains shaky as the two NATO allies remain at odds over policies in Syria and over Turkey’s push to purchase a Russian missile defense system.

Finance Minister Berat Albayrak announced a reform package on Wednesday that mainly aims to recapitalize state banks squeezed by large companies restructuring debt.

Analysts have said that investor confidence could be restored if such reforms were implemented under the supervision of the IMF, a move Turkey has strongly rejected.

Yet when asked whether Turkey would seek funding from the IMF or another outside institution, six poll respondents said no. Nor is Turkey expected to hold early elections ahead of 2023, when presidential and parliamentary elections are scheduled, according to five respondents.

Among Albayrak’s reforms were plans to lower inflation, which hit a 15-year high of above 25 percent in October. It stood around 20 percent in March.

The poll showed that annual inflation is expected to decline to 17.5 percent by the end of the second quarter and drop to 15.5 percent by year-end, in line with government forecasts. It is expected to drop to 11.8 percent by end-2020 and 9.1 percent by end-2021.

The poll also showed the current account deficit - which ballooned last year but has since receded as the economy slowed - is expected to stand at 2.4 percent of the GDP this year, lower than a government forecast and down from 6 percent in the previous year.

The central bank hiked its policy rate to 24 percent in September and has left it unchanged since, though some investors worry about a premature easing of monetary policy.

President Tayyip Erdogan, a self-described “enemy” of interest rates, has in the past called on the central bank to lower its rates. Central bank Governor Murat Cetinkaya has said its tight monetary stance will be maintained until inflation shows a “convincing improvement.”

In a separate poll last week, economists predicted the central bank will gradually lower its key rate to 19.25 percent by year end, and to delay any cuts until around July, and to ease less aggressively than previously thought.

Polling by Hari Kishan in Bengaluru, Nevzat Devranoğlu in Ankara; Additional reporting by Ali Kucukgocmen; Editing by Jonathan Spicer

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