Fiscal tightening curtails Turkish infrastructure spend, economy contracts

Turkey’s economy will contract every quarter through mid-2019, with Gdp growth in 2018 forecast at just 1.5%, followed by a -2% contraction in 2019, according to Moody’s. Persistent high inflation and the expected slowdown in lending will curtail growth, which should then rebound 3% in 2020.

Turkey’s economy began decelerating rapidly in the third quarter, in the wake of the currency crisis. “Double-digit inflation, a steep increase in borrowing costs and curtailed bank lending are likely to weigh on household purchasing power, private consumption as well as investment, causing a severe contraction in domestic private sector demand,” Moody’s says in a report seen by Kallanish.

Recently announced tax cuts will not halt inflation and will do little to boost consumption, particularly amid high interest rates that curtail borrowing.

Inflation has risen steadily from around 10% at the beginning of the year to 25.3% in October. Moody’s expects inflation will grow further in the coming months and remain at double-digit rates through 2020.

Coupled with a slower economy and higher inflation, a significantly weakened Turkish lira will worsen loan quality, profitability and capital at Turkish lenders. “Turkish banks’ heavy reliance on foreign currency funding also increases the risk that they could face a funding squeeze if already weak investor confidence worsened and limited their access to market funding,” Moody’s observes.

“High inflation and the weaker lira will raise corporates’ costs,” Moody’s continues. “Companies focused on the domestic market, and particularly those in discretionary and premium segments, will find it harder to pass these costs on in a slowing economy where consumers’ disposable income is falling. Fiscal tightening will lead to a reduction in infrastructure spending, which will affect the construction and industrial sectors and further reduce growth and consumers’ purchasing power.”