IS THE REVISED GROWTH FORECAST ENOUGH FOR INVESTORS?

Turkey sharply cut its growth forecasts for this year and next on Septemebr 20, a reduction that failed to mollify investors who wanted a more sober assessment of the fragile economy and a sweeping plan to help banks, a Reuters article stated. “Markets had been hoping that Finance Minister Berat Albayrak would use September 20’s announcement of a new medium-term economic program to signal an unambiguous break from the credit-fueled growth that has characterized Turkey over the last decade and a half under Erdogan’s rule,” it said.

Albayrak said growth would be 3.8 percent this year and 2.3 percent in 2019, both revised down from forecasts of 5.5 percent. “He did not deliver the big plans for the banking industry that some analysts had been hoping for, particularly the creation of a “bad bank” vehicle to take over non-performing loans.”

“At the moment, the program is a disappointment. First, when you look at the growth forecast and the current account deficit forecast, they are too ambitious,” Guillaume Tresca, a senior EM strategist at Credit Agricole told Reuters. “We don’t have anything new, regarding a bad bank, regarding the treatment of non-performing loans, regarding the foreignexchange funding of the banking system or the foreign-exchange funding of corporates. It is lacking details and it is lacking news.”

Following the presentation, the chairman of Turkey’s BDDK banking watchdog said there would not be a transfer of problem loans to another institution.

‘Delicate balance’

Sources told Reuters on September 19 there was a debate among top government officials about the extent of the growth revisions, highlighting the delicate balance between Erdogan’s long-standing drive for economic expansion and investors’ calls for greater austerity.

“We will see a gradual growth increase from now on. Our main goal is to establish five percent growth from 2021 onwards,” Albayrak, Erdogan’s son-in-law, said during his September 19 presentation. “We are aware of the economy’s strong and weak points.”

He did not take questions.

For financial markets, the biggest concerns remain inflation - which Albayrak forecast would hit 20.8 percent this year and 15.9 percent next year - and the banking sector.

Turkey’s banks face a potential deluge of bad debt as the lira sell-off has driven up the cost for companies to service their foreign currency loans. For years Turkish firms borrowed in dollars and euros, drawn by lower interest rates. JPMorgan estimates that the private sector has around $146 billion in external debt maturing in the year to July 2019.

Ratings agencies have sounded alarm bells over the outlook for banks. Fitch has estimated that banks’ foreign-currency lending stood at around 43 percent of all loans. But the government has repeatedly said it does not expect problems in the banking sector.

“The lack of ‘burden sharing’ signs in the restructuring of the real sector debt in Minister Albayrak’s speech seemed to have led to a sharp deterioration in sentiment,” Gokce Celik of QNB Finansbank said in a note to clients.

Albayrak later told broadcaster CNN Turk that public banks faced no financing problems this year.