Market expectations, indicators signal healthy recovery for Turkish economy in 2020

The positive outlook for the Turkish economy's growth next year has been corroborated by international financial institutions and strategists, though suggestions for continued reforms are being maintained

The surprising developments that indicated the quick recovery of the macroeconomic outlook of the Turkish economy have been reverberated among the global monitoring agencies, investment banks and strategists and corroborated in their upward revisions for the 2020 estimates.

The mitigating inflationary pressure, the stabilized Turkish lira, the uptick in industrial output and the reformative agenda of the government have rendered the expectations for the Turkish economy's 2020 performance from contraction to positive growth. The easing monetary policies of the major central banks around the world, a policy spearheaded by the U.S. Federal Reserve and the European Central Bank (ECB), have also boosted hopes for increasing capital inflow to the emerging markets, and Turkey is often cited among the beneficiaries of this trend that is expected to continue throughout next year.

The portfolio managers and strategists that participated in a recent Bloomberg survey labeled Turkey among the fastest-growing emerging economies next year. A total 64% of the 57 strategists and economists responding to the survey said the Turkish economy will register positive growth in 2020 and 60% of them expressed growth estimates for Brazil's economy.

According to Turkey's new economic program for 2020-2022 unveiled by Treasury and Finance Minister Berat Albayrak in late September, the government expects a 5% annual economic growth for each of the next three years.

In the third quarter of this year, Turkey's gross domestic product (GDP) registered the first expansion following three consecutive quarters of shrinkage and grew 0.9% compared to the July-September 2018. The average estimates for the fourth quarter of the year are 4.5% to 5%. The overall annual growth forecasts vary by 0.3% to 0.6%.

In a recent report, the Spanish Bank BBVA said the monetary policy impulse and the favorable base effects in the coming two quarters would result in an acceleration in activity. "Taking into account the pick-up in credit growth, favorable base effect, the recovery in electricity and auto productions, confidence indices and our big data indicators such as retail sales and investment expenditures, we think that economic activity will improve faster in the last quarter of 2019 and first quarter of 2020," the BBVA said, expecting a 0.3% growth in 2019.

In another report, the Institute of International Finance (IIF) drew attention to the bullish sentiments regarding the growth performance of the Turkish economy next year. The IIF explained that despite the varying estimates on the economy's expansion next year, three factors remain consistent. According to the IIF observation, lower interest rates continue to nurture the growing optimism that the Turkish economy will bounce back next year while less uncertain macroeconomic outlook will subside in line with the normalizing Turkey-U.S. relations and current account imbalance will remain modest.

"After a reserve drawdown of $10 billion in 2018, we project that net capital inflows to Turkey will be sufficiently large to finance a small current account deficit without any reserve drawdown in 2020," the IIF said.

In a statement to Daily Sabah yesterday, Carla Slim, MENA Economist at the London-based bank Standard Chartered, stressed that 2020 will be marked by a return to positive growth in the Turkish economy. The bank revised up its estimates to 1.5% from the previous forecast of 0.6%.

Referring to the upside risks to the 2020 forecast, Slim cited the potential expansion of the nonperforming loans. "Sectors – including finance, services, and agriculture – have shown signs of recovery in 2019," she noted but warned that construction weakness is feeding through to non-performing loans (NPLs), highlighting Turkey's corporate debt risk and the spillover to banks' balance sheets. In the same vein, IIF also suggested a prudent policy mix as geopolitical uncertainty can be persistent and incomplete corporate restructuring put some risks in the medium term.

According to a report by Bloomberg yesterday, Turkish plans will set up a fund management firm by the end of the first quarter that will take over the NPLs to provide more room for credit expansion to harness economic growth. Recently, the Banking Regulation and Supervision Agency (BDDK) asked banks to develop road maps to reduce NPLs. According to the BDDK data, the NPLs averaged 5.2% in October, which might rose to 6.3% by the end of the year.

Piotr Matys, a Rabobank emerging market strategist, drew attention to the geopolitical risks for the Turkish economic outlook next year. "The S-400 saga, the pace of interest rate cuts, potential political events and geopolitics will set the tone for the Turkish lira and the Turkish economy throughout 2020," he said.

The Rabobank strategist also stressed that the inflation is likely to rise further at the beginning of next year due to base effect and the central bank may have to slow down on the loose monetary policy.

Turkish inflation dropped to 10.56% in November after hitting 25.24% in October 2018 and the-year end forecast for the inflation is 11.5%.

Emerging market assets

The emerging-market assets, including currencies, bonds and stocks, will be enjoying the capital flow next year as a result of the rate slashing across the globe to support the sluggish growth, the experts asserted. Total wealth in emerging-market stocks and bonds now exceeds $25 trillion, bigger than the economies of the U.S. and Germany combined, according to Bloomberg and emerging markets have added $11 trillion to investor portfolios in the last decade, the agency said.

In this environment of capital flow into the emerging markets, Turkey also wants to grab its share and moderate signs for increasing flow into the Turkish stocks have been recently observed.

Turkey's MSCI Exchange Traded Funds (ETF) have begun seeing upward movement over the last month, albeit slight volatility. The Turkish ETFs rose 0.12% up to $26.62 on NASDAQ yesterday. The MSCI's emerging markets stock index rose yesterday as much as 1% to a near five-week high, while the currencies index added up to 0.3%.

What's more, Turkey's stock exchange Borsa Istanbul delivered its highest performance in the last year this month. The benchmark index BIST 100 was trading at 109,299 points yesterday at 2:33 p.m. local time, up 1.28% from the previous closing. If the geopolitical tensions do not arouse in the upcoming period to the extent to avert investors away from the Turkish assets, analysts expect that the Turkish stock exchange could again hit 120,000 points, a level the market previously enjoyed prior to the April 2017 constitutional referendum.

Upward revisions

In the second half of this year, several international finance institutions revised up their estimates of the Turkish economic growth. In its October report, the World Bank said Turkish economic growth is expected to rebound to 3% in 2020, led by a recovery in private consumption and investment, accelerating further to 4% in 2021. "The slowdown in European economies is likely to offset Turkey's exports, but accommodative global monetary conditions may support faster recovery," the institution warned. It suggested that restoring investor confidence through the implementation of a robust economic program will be essential for a sustained recovery.

In its September report, the Organization of Economic Co-operation and Development (OECD) revised the 2019 forecast to 0.3% growth from a 2.9% contraction. For next year, the organization expects a 3% growth in the Turkish economy.

The U.S.-based credit rating agency Moody's recently revised Turkey's economic growth forecast to 0.2% for 2019 from a 2% contraction and 3% for 2020 from 2%, citing the country's strong economic recovery. The International Monetary Fund (IMF) report said the Turkish economy may see a growth of 0.25%, reversing previous forecasts of a 2.5% contraction.

The U.S.-based investment bank JPMorgan also made a revision in its estimates for the Turkish economic growth. The bank said that the GDP will grow 0.3% this year and 2.3% next year. JPMorgan had previously said the Turkish economy would expand by 0.2% this year.

In a November report, the European Bank for Reconstruction and Development (EBRD) said the Turkish economy will reach a growth rate of 2.5% next year.

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