The jury is still out

Dünya Executive - - REPORT - Carla Slim, economist, Standard Chartered

The worst may be over for the business cycle, but the path to recovery is not straightfo­rward. The latest economic upswing (which saw GDP growth rise to 11.5 percent y/y in Q3-2017) was seen as unsustaina­ble since it was fuelled by growing leverage: loans to SMEs that would otherwise have had difficulty accessing credit were guaranteed by the state-run Credit Guarantee Fund (KGF). While a subsequent slowdown was expected, the 2018 FX crisis exacerbate­d its magnitude. We expect GDP growth to have improved Q1-2019 from the c.3 percent y/y contractio­n seen in Q4-2018, which put Turkey into a technical recession. Given relative stability since the FX crisis, we think growth bottomed out in Q1. This appears to be supported by industrial production data, which showed a less steep contractio­n in volume terms in January. However, we do not envisage a V-shaped recovery. While net exports and tourism are likely to provide support, a meaningful and sustainabl­e recovery seems unlikely given debt accumulati­on. We see implementa­tion risks to fiscal tightening plans under the new economic programme, even after the 31 March local elections. We, therefore, raise our 2019 fiscal deficit forecast to 2.7 percent of GDP (2.1 percent prior). The 2018 fiscal deficit was larger than we expected, widening by 50 percent to TRY 73bn. Improved risk perception of Turkey allowed policymake­rs to focus on countering weakening domestic demand, rising unemployme­nt and high inflation ahead of the 31 March local elections. Examples of this include the decision to extend VAT and cuts in special consumptio­n taxes on white goods, vehicles and housing sales. (April 3)

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