Turkey: Is The Worst Over Yet?

The Turkish economy's wild ride is finally calming down.

After a tumultuous summer that saw Turkey embroiled in a damaging trade war with the US, its currency lose 40% of its value against the US dollar, and interest rates jump from 17.75% to 24%, the country’s economic outlook is more stable.

The newfound stability was precipitated by Turkey’s release of American pastor Andrew Brunson (whose incarceration sparked the trade war), the partial recovery of the lira—now down just 20%—and the unveiling of a New Economic Program (NEP) in late September by President Erdogan’s son-in-law, Finance Minister Berat Albayrak.

“The fluctuations in our economy and financial markets have ended. Turkey faces no problems securing financial sources,” Albayrak told an Istanbul investment conference. Albayrak added that markets were responding well to the ambitious NEP, which details the government’s economic aims for the next three years and prioritizes infrastructure investment.

Some analysts aren’t as confident, suggesting that the NEP’s growth, budgetary and inflation targets are unrealistic, given the expected drop in domestic consumption following this year’s inflation and interest-rate hikes. They also say that the decision to establish a financial development committee to oversee markets was worrying, since it could further undermine the independence of the central bank, currently one of investors’ biggest concerns about Turkey.

“The program is a little underwhelming and gives no guarantee that Erdogan will stop berating the central bank,” says Jason Tuvey, emerging markets analyst at Capital Economics. “It also ignores the fact that in the short term, Turkey will be entering a deep recession.” He believes GDP will grow 3% this year due to strong growth recorded in the first half, but Q4 2018 and Q1 2019 will see GDP contracting by as much as 4% to 5%, leading to a full-year contraction for 2019 of around 0.5%. Tuvey expects recovery to begin in late 2019, and inflation to be receding by 2020, with some benefits from the lira’s fall.

“[Turkey] has a big manufacturing sector, which has the capacity to boost exports,” he says. “This should feed into growth.”