Erdogan Puts Stamp on Economic Vision That Rests on Flimsy Base
It “needs a massive positive shock from somewhere to make this happen, or policy rates much lower and the lira weaker,” he said.
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President Recep Tayyip Erdogan’s quest for Turkey’s economic rebirth is already struggling to keep its numbers straight.
Targets laid out by Treasury and Finance Minister Berat Albayrak on Monday make official what the president gave as a sneak preview weeks ago, setting out a goal of 5% growth for 2020-2022 after slashing this year’s forecast near zero. Despite the expectation of the economy’s sudden awakening months after recession, the rest of the outlook is leaving analysts with a case of whiplash.
The assumption is that Turkey’s liftoff will require little fiscal stimulus, even after the central bank said its “front-loaded” dose of monetary easing has left limited policy space. It also anticipates that the spurt is possible without heating up inflation and generating the yawning gap in the current account that haunted Turkey’s previous upswings.
“High growth, low inflation, a small fiscal deficit and a small current-account-deficit,” said Tim Ash, a strategist at BlueBay Asset Management in London. “How is this all possible?”
It “needs a massive positive shock from somewhere to make this happen, or policy rates much lower and the lira weaker,” he said.
- Consumer price growth will ease to an annual 12% at the end of this year, dropping to 8.5% in 2020 and 6% the following year, according to Albayrak’s presentation to reporters in Ankara
- The ratio of the central government budget deficit to gross domestic product is seen at 2.9% in 2019, up from a previous forecast of 1.8%; the gap is projected at 2.9% in 2020 and 2021, and 2.6% in 2022
- The current account will return to deficit of 1.2% of GDP in 2020 and 0.8% in 2021 after a slight surplus this year
- Unemployment will stagnate at 11.8% in 2020 from an estimated 12.9% this year, little changed from a previous forecast
Erdogan, who advocates an unorthodox theory that high interest rates cause rather than curb inflation, has made credit stimulus and easier monetary policy the centerpiece of Turkey’s efforts to replicate growth levels last seen before a currency crash last year. The risk is that the fixation on growth at all costs could once more spook the market and expose the vulnerabilities that pushed Turkey to the brink a year ago.
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| “Turkey applied a healthy dose of realism to its growth forecast for this year. But it came with an equal measure of wishful thinking for its 2020 target.” -- Ziad Daoud, Mideast economist Click here to view the piece. |
Albayrak said the statistical effect of the recent downturn will play a role in catapulting Turkey’s growth from just 0.5% in 2019 to 5% in 2020. A decline in interest rates and the risk premium will also likely gain momentum next year, with the economy set to get an additional boost as consumers make up for delayed spending, he said.
Under a new governor installed by Erdogan in July, the central bank has already cut borrowing costs by 7.5 percentage points.
Albayrak’s predictions also show policy makers remain cautiously optimistic on prices. In his presentation on Monday, the minister said government spending would be in line with the targeted inflation path.
The central bank has recently said inflation might end this year below its July prediction of 13.9%, citing downside risks from weak demand. Price growth has slowed thanks to a stronger currency and a moderation in food costs.
Investors took Albayrak’s message in stride. The lira kept gains and traded 0.4% stronger against the dollar. The yield on the government’s two-year note is near the lowest since March 2018.
But Turkish assets are hardly in the clear, according to Piotr Matys, a London-based strategist at Rabobank. The International Monetary Fund has already warned that “the current calm appears fragile.”
“If those forecasts were supported by a comprehensive package of economic reforms, that would increase confidence among investors that Turkey is indeed on the path to strong -- and more importantly -- well-balanced growth,” Matys said.
“Such crucial details, unfortunately, were not included, leaving investors with the view that the administration intends to achieve 5% growth mainly using credit stimulus,” he said.
(An earlier version of this story corrected fiscal targets for 2021 and 2022 after the Treasury and Finance Ministry said its presentation contained inaccurate information.)
--With assistance from Asli Kandemir.
To contact the reporters on this story: Cagan Koc in Istanbul at ckoc2@bloomberg.net;Firat Kozok in Ankara at fkozok@bloomberg.net;Selcan Hacaoglu in Ankara at shacaoglu@bloomberg.net
To contact the editors responsible for this story: Onur Ant at oant@bloomberg.net, ;Alaa Shahine at asalha@bloomberg.net, ;Taylan Bilgic at tbilgic2@bloomberg.net, Paul Abelsky, Constantine Courcoulas
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