EBRD cuts Turkish forecasts on back of recent lira volatility
Currency seems to have stabilised after government, Central Bank steps and US rapprochement
The European Bank for Reconstruction and Development (EBRD) has cut its forecasts for economic growth in Turkey in 2019 in the wake of a depreciation of the lira and interest rate rises that have put pressure on consumption and investments.
However, in its latest Regional Economic Prospects report, the EBRD said the lira seems to have stabilised after a series of sharp central bank interest rate rises, the adoption of the government’s New Economic Programme and a recent rapprochement in relations with the United States of America.
The EBRD expects growth in Turkey of 1 per cent in 2019, compared with a prediction of 4.2 per cent in May this year. Economic growth is expected to have slowed to 3.6 per cent in 2018 from 7.4 per cent in 2017 after indications of a sharp slowdown in the second half of this year.
The report said economic rebalancing forced by the weak lira should help reduce large external imbalances in the economy, but it noted the short term external financing requirement remains high, in excess of 25 per cent of Gross Domestic Product .
The EBRD said risks to its forecasts included uncertainty about the banking sector as well as about the direction of economic policy and from a further possible depreciation of the lira.
It said the lira remained vulnerable because of the Turkish economy’s heavy dependence on foreign capital. At the same time, inflation had risen to a 15-year high of almost 25 per cent in September 2018 as a result of the lira’s fall and consumption reflecting earlier government stimulus packages.
The report also referred to growing stresses among banks, a sector that previously had been seen as a key anchor of the economy. Lira depreciation had hurt banks’ capital and their asset quality may be impacted by both their exposure to corporates with large foreign exchange liabilities, and the effect of increased interest rates on corporate and household balance sheets.
The report noted that the Banking Regulatory and Supervisory Authority had introduced several measures to address the issues faced by banks but there are concerns about the impact of these measures on balance sheet transparency and confidence in the system.