A weaker lira has helped Turkey’s macro indicators in early 2016. In Q3 2015, the nation’s GDP grew 4% y/y, as compared with 3.8% y/y in Q2. According to Danske Bank, the Turkish economic growth is likely to slow to 2.7% y/y in 2016 due to tight monetary policy and geopolitical scenario impacting foreign trade. In January, Turkish industrial production continued to grow strongly by 5.6% as compared with December’s growth of 4.6% y/y.
Both durable and non-durable consumer goods production have recorded strong growth. However, local consumer sentiment has started falling. This is expected to weigh on private consumption, partially suppressing growth of industrial production. Turkey’s current account balance entered negative territory in spite of low oil prices as exports to Russia declined.
“We continue to see downside risks to the current account development, as we expect Russia’s economic sanctions to weigh on USD45bn of bilateral trade annually, hitting the Turkish tourism sector and agricultural exports”, says Danske Bank.
Meanwhile, Turkey’s inflation in February slowed to 8.8% from January’s 9.6% y/y as the impact of lira’s weakness on prices alleviated. In the short and medium term, Turkish lira is likely to get support because of recovery in global risk sentiment and increasing inclination for emerging market assets due to dovish ECB, Fed and Bank of Japan, says Danske Bank.
“We see a slight deterioration in the TRY spot in the long run, due to rising oil prices and weaker exports, which we believe will add to pressure on the current account deficit”, says Danske Bank.
Sentiment might deteriorate due to uncertainty regarding the nation’s current geopolitical risks, cross-border operations and volatile FX inflows. Current account might get pressurized again due to higher oil prices. According to Danske Bank, further dovishness by major central banks is a strong risk on the upside to its TRY forecasts.
