Turkey sees better ‘growth’, inflation outlooks next year

Turkey’s debt mess looms

ANKARA, Sept 30, (RTRS): Turkey on Monday raised its economic growth forecast to 5% for next year, and lowered its inflation outlook to 8.5%, according to the government’s new medium-term programme that predicted a relatively quick rebound from recession.

Slides presented by Treasury and Finance Minister Berat Albayrak showed the economy was expected to grow at a 0.5% rate in 2019 and at 5% in 2020, a revision of last year’s forecast of 2.3% growth for this year and 3.5% for next.

Albayrak said leading indicators point to a recovery in activity in the current third quarter, following three straight quarters of year-onyear contractions. The forecast for 2021 was unchanged at 5%, the same as that for 2022.

Turkey, which was hit by a currency crisis last year, also trimmed its 2019 and 2020 inflation forecasts to 12.0% and 8.5% respectively, from last year’s predictions of 15.9% and 9.8% respectively.

The 2021 inflation forecast remained steady at 6.0%.

Last year’s crisis sent Turkish inflation soaring above 25% and chopped nearly 30% off the value of the lira. That prompted the central bank to aggressively hike rates as the economy tipped into recession and unemployment shot higher.

Inflation has since dipped to 15%, and the bank has slashed rates 750 basis points in the last two months to encourage a recovery in domestic demand, with analysts expecting a bit more monetary easing before year end.

Albayrak said the “coordination” between monetary and fiscal policies would continue, adding the government “strongly” supports the central bank’s fight against inflation.

Albayrak said on Monday that steps taken by the government would give banks a “clean slate” to begin lending again, but bankers and analysts said Ankara needed to do more to understand the extent of the mess and to finally clear it up.

Two senior bankers said that big lenders may not completely abide Ankara’s most aggressive move so far: a directive two weeks ago for banks to reclassify as non-performing loans (NPLs) some 46 billion lira ($8.2 billion) in debt.

Sour loans are among the worst hangovers from last year’s currency crisis, which knocked some 30% off the Turkish lira and left companies unable to service what were once cheap foreign-currency loans.

Turkish banks held some 124 billion lira in NPLs at the end of August, up from 79.5 billion lira a year earlier.

Albayrak, in an annual presentation of economic forecasts, said “we have taken innovative steps for banking-sector NPLs,” adding it was time for private banks to take a “proactive role” in extending credit.

“We will see the beginning of a clean slate for banks in the upcoming period. We think they will return to providing financing,” Albayrak said in Ankara.

Private banks in particular have hesitated to lend since the economy tipped into recession, citing uncertainty around fiscal policy and continued volatility in the lira, and hoping the Treasury would ease any losses on the loans.

Inaction on the bad debt through the spring and summer frustrated the government, which itself was not willing to put money on the line.

That prompted the BDDK banking watchdog to issue the directive on Sept 17 telling banks to provision for losses on the NPLs.

But the two senior bankers involved in NPL discussions said that, before the BDDK made its 46 billion-lira announcement, big lenders had already reclassified as NPLs some 10-15 billion lira worth of the loans.

The bankers added that the rest covered by the BDDK directive may not be reclassified, in part because banks have restructured part of it.

“This BDDK decision should be interpreted as leaving it up to the banks to decide,” one of them said, requesting anonymity because he was not authorized to speak publicly about the issue.