Turkish Economy News 2020

The government has published a new 2020-2022 economic agenda with aggressive growth goals in the midst of rising geopolitical tensions. While geopolitical tensions eased mostly at the end of October, questions remain about the economic prospects of Turkey and the high growth ambitions of the state.

The program provides an optimistic 5.0 percent growth target over the timeframe. Muhammad Mercan, chief economist at ING Turkey, pointed out that the forecasts are rather positive "because of the elevated levels of corporate indebtedness and ongoing deleveraging as well as a daunting global backdrop of growing uncertainty." Maya Senussi, senior economist at Oxford Economics, commented that "if anything, there is a risk in the search to achieve an optimistic growth rate."

As per the program, private consumption and investment will be the main drivers of economic growth. Nevertheless, the program is mostly lacking of clear plans and policies and assumes that due to stronger domestic demand and more stable financial circumstances, the ambitious 5 percent growth goal will mostly be achieved. In addition, the program envisages a moderate current account deficit for 2020–2022, which appears unlikely as a sharp recovery in domestic demand is likely to support up imports. Against this background, Goldman Sachs ' research team noted that "growth will come at the expense of wider imbalances[ which] increases the risk of further TRY fluctuation" due to the need to attract large amounts of foreign capital and keep fiscal policy loose; this is a move away from the 2019-2021 program that sought to keep the fiscal deficit under control.

Turkish Debt Collector

Since growth is likely to be powered by credit and additional financing, the inflation expectations of the government tend to be ambitious and far weaker than the forecasts of experts. By the end of next year, a return to single-digit inflation is expected by some policy changes to public wages and prices. Muhammet Mercan, nevertheless, pointed out that "given the still high expectations of forward-looking inflation, sticky service prices and susceptibility to exchange rate fluctuations, risks are skewed to the upside, as targeting inflation seems difficult." Goldman Sachs analysts highlighted wage growth as an additional upside risk".

In addition to an already stressed economic situation, the recent U.S. decision to impose trade sanctions on Turkey and to halt trade talks on a trade deal between the two countries increased financial and exchange-rate uncertainty. It's On 14 October, President Trump authorized punitive action against Turkey following the Turkish army's incursion into northern Syria. While a ceasefire has been negotiated since then, and Trump said that if the agreement is maintained, he will lift all sanctions, geopolitical risks remain high and challenge the growth prospects of Turkey. In short, as summarized by the research team of Nomura, this episode "re-emphasizes the geopolitical threats that so seriously undermined the lira in the summer of 2018."

Going forward while it is predicted that the Turkish economy will return to growth in H2, it is likely to remain on a low footing. Next year, the growth is expected to gain traction, partially aided by a base effect and monetary policy easing for the Central Bank.

Expert Panelists are expecting the economy to expand by 2.3 percent in 2020, up 0.1 percentage points from last month's estimate, and 3.3 percent in 2021.

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