Turkish economic growth likely to decelerate this year, CBT to remain hawkish and independent

The Turkish economic growth had decelerated in the second quarter from the first quarter. It slowed to 3.1 percent from 4.7 percent, worse than consensus expectation of 3.7 percent year-on-year as tourist arrivals dropped and exports hurt from sanctions imposed by Russia, noted Danske Bank in a research note.

“We continue to keep our 2.7 percent y/y GDP growth forecast for 2016 unchanged, staying under consensus, which is declining from month to month (current 3.3 percent y/y)”, added Danske Bank.

Turkey’s sovereign debt rating has been downgraded by ratings agencies. Also the nation’s outlook has also been lowered by the ratings agencies after the attempted coup in July 2016 increasing worries regarding high political uncertainty. Standard & Poor’s lowered its rating to ‘BB’ in July, while Fitch affirmed its rating at ‘BBB’- in August and lowered its outlook to ‘negative’ from ‘stable’. On 24 September, Moody’s Investors Service lowered Turkey’s rating to junk, indicating to risks related to external financing as economic growth is decelerating.

While the Turkish current account balance continued to be in negative territory, registering a deficit of USD 2.6 billion in July, it rebounded a bit a month earlier, as Turkey gained from global emerging market rally inflows in early July.

“We expect the current account deficit to expand to around 5 percent of GDP in 2016, from 4.5 percent in 2015, as rising oil prices and shrinking exports (mainly of services) weigh on the balance”, stated Dankse Bank.

Inflation accelerated more than 8.7 percent as the Turkish lira dropped on concerns of rising political uncertainty, falling to 8.1 percent in August. The Central Bank of Turkey maintained its policy rate at 7.5 percent in September, consistent with consensus, whereas the overnight lending rate was lowered by 25 basis points. The central bank is expected to remain hawkish and independent.

“Given the political uncertainty and wide current account deficit on a rising oil price, we expect USD/TRY to stay at 2.98 in 1M, 3.05 in 3M, 3.07 in 6M and 3.15 in 12M”, added Danske Bank.