Fiscal stimulus will continue

Philippe Dauba, Pantanacce, senior emerging-market economist, Standard Chartered

Dunya Executive - - REPORT -

Developments since the referendum, namely the extension of the state of emergency, are likely to weigh further on the recovery in inbound tourism. Growth in government consumption was a key source of support for economic activity in 2016 – it grew 7.3 percent, partly offsetting slower private consumption at 2.3 percent. To offset slower private consumption, we expect the government to continue to provide fiscal stimulus. The government posted a fiscal surplus of 4.6 billion lira in the first two months of 2017; this was down 30 percent year-on-year due to a 20 percent increase in government spending. We expect a fiscal deficit of 3.1 percent of gross domestic product in 2017 as a result of the fiscal stimulus.

The authorities had positioned the presidential referendum as a pre-requisite for economic reforms, saying it would ensure that domestic stability prevails. It remains to be seen whether the policy focus will turn swiftly to structural reform implementation. The lower probability of early elections – they are likely to be held in 2019 as scheduled – could create more room for policy focus on structural reforms. We expect the Central Bank to keep liquidity conditions tight and see potential for further rate hikes, given our expectation of two more U.S. Federal Reserve hikes this year.

(April 19)

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