Economy in 2019, in pictures

TURKEY - Report 30 Dec 2019 by Murat Ucer

---

Executive Summary:
• The recession of 2018 was short and shallow, thanks to looser global monetary policies, Trump’s leniency toward Turkey that kept political risks in check, and huge amount of domestic stimulus...
• Growth should now finish the year in moderately positive territory, in contrast to the contraction that was the consensus view earlier this year...
• Yet, it took a lot of stimulus to get here: State banks went on a lending binge, reserve requirements have been tweaked to entice banks to lend, the CBRT cut the policy rate by 1200 bps, billions of dollars of reserves were spent for lira stability and the budget target was missed by a wide margin...
• Meanwhile, inflation fell to low double-digits thanks to a stable lira, last year’s high base and benign behavior of food prices, while the current account moved from a large deficit to moderate surplus...
• But inflation still looks rather sticky – and elevated, while the current account swing was largely driven by a sharp drop in imports, as capital inflows remained weak...
• In sum, Turkey survived another year, but surviving is not thriving, nor is it sustainable, as many of the structural problems -- high private indebtedness, the hangover from the end of a construction- led/credit fueled growth model, lack of policy credibility and no productivity growth – have yet to be addressed properly...
• Hence, our diagnosis – that “This Time Is Different” -- is still the right one, we think: a sustainable pick-up in growth calls for a multi-pronged strategy that tackles the debt problem, restore confidence and attract sizeable inflows...
• Ankara’s thinking is very different, though. It believes Turkey’s “potential” growth rate is still around 5%, remains singlehandedly focused on achieving it mainly through lower interest rates, and claims this will happen without much of a current account deficit, and as inflation slows to single digits...
• Meanwhile, political risks remain elevated, so is the country risk premium, recent improvements notwithstanding, while the sovereign rating remains several notches below Investment Grade...