Turkish economy likely to contract in Q3, CBRT likely to further lower rates

14 September 2016, 08:39
Eko Rediantoro
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The Turkish government took back control following the attempted military coup in mid-July; however, the government has declared an emergency rule of three months that is expected to be extended. The political situation was anyway quite risky since May 2016. With emergency rule and the purge of the parallel network going on, there is broad based concern regarding how AKP would use the broad range of political powers and whether or not business activity can really continue to be normal.

The second quarter data indicated that private sector activity momentum was easing even before the attempted coup event. The Turkish economy is expected to expand 2.3 percent in the whole of 2016 and 1.9 percent in 2017, as compared with the earlier projections of 3 percent in 2016 and 2.1 percent in 2017, noted Commerzbank in a research note, even if the re-start of exports to Russia in the third quarter and expansionary monetary and fiscal policy would buffer the downturn to a certain degree.

The Turkish economy is likely to shrink 0.6 percent in sequential terms in the third quarter and register near-zero growth again in the fourth quarter, from where a slow normalization is likely next year if there are not additional shocks, added Commerzbank.

Meanwhile, inflation control has been a secondary objective of the government in recent years and as the Turkish governments seeks to stimulate growth in an emergency rule environment, inflation would likely play a small role. But the global inflation cycle is benign, and the main driver of Turkey’s inflation had been the weakness of lira. While TRY is likely to depreciate by about 12 percent the end of 2016, it is unlikely that there would be a lira crisis.

“The combination of slower economic growth and moderate lira depreciation means that inflation could average 7.6 percent for 2016”, noted Commerzbank.

The Turkish government has already exerted pressure on the central bank to aggressively lower interest rates. Since the start of 2016, the CBRT has lowered the upper-end of the rate corridor by 25 basis points and also lowered reserve requirements. Moreover, macro-prudential easing is coming, for instance an easing of credit card lending norms, stated Commerzbank.

“We expect the average funding costs for banks to fall another 150bp until year”, said Commerzbank
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