News ID: 220448
Published: 0654 GMT August 27, 2018

Turkey inflation to hit 20%

Turkey inflation to hit 20%

Turkey is facing the prospect of a leap in inflation this year and a sharp contraction in its economy in 2019 as the country’s currency crisis continues, according to analysts at S&P Global.

The Turkish currency went into free-fall at the beginning of the month when Donald Trump, the US president, imposed economic sanctions over a political dispute, hitting a record low of 7.24 lira to the dollar. It has crept up slightly since, but the long-term effects of the crisis are still emerging, Arab News wrote.

“The exceptional volatility of the lira exchange rate over the past two weeks and a significant tightening of both external and domestic financing conditions, as well as a broader decline in confidence will, we believe, undermine the Turkish economy,” S&P said in a research note.

“We project that after average growth of more than 5 percent over the past three years, the economy will contract by 0.5 percent in 2019, with both consumption and investments reducing sharply, the latter by a projected six percent. At the same time, we project that inflation will peak at above 20 percent and the unemployment rate will rise to 12 percent next year,” S&P, the US agency that rates countries’ and corporates’ creditworthiness, added.

The government of President Recep Tayyip Erdogan has blamed the Americans for the crisis, accusing it of waging ‘economic war’ on his country and refusing to raise interest rates or open talks with the International Monetary Fund for financial assistance.

As the crisis unfolded, Qatar promised funds to arrest the slide in the lira and bring liquidity back to the Turkish financial system, with a suggested $15 billion package of support. Economists — still awaiting full details of the Doha offer — expressed doubts this will be enough to arrest the decline.

S&P said: “If implemented, the $15 billion support package could provide some support to the Turkish economy. However, details remain scarce and we understand the financing will likely come over a number of years rather than be front-loaded.

“It is also unclear whether some of the investments included represent net new financing as opposed to ongoing undertakings previously agreed between the two governments. Finally, we believe that Qatar’s support will likely come with limited economic conditionality and not require Turkey to address the root causes of current balance-of-payments stress,” S&P said.

There have been fears that the Turkish crisis could have broader repercussions for the global economy, especially in Europe where many bank creditors are domiciled.

Jason Tuvey, Middle East economist at London-based Capital Economics, said in a recent research note: “The plunge in the lira which began in May now looks certain to push and may well trigger a banking crisis. This could be another blow for emerging markets as an asset class, but the wider economic spillovers should be modest, even for the eurozone.”

S&P, in line with other credit raters, already downgraded Turkey’s creditworthiness to ‘junk’ levels even before the crisis intensified with the US sanctions, raising concerns about the resilience of the country’s banking system.

“The sharp depreciation of the lira is increasingly hampering Turkish private-sector borrowers’ ability to repay their debt, a large portion of which is in foreign currency and owed to Turkish banks,” S&P said.


“In our view, the institutional framework has weakened in Turkey over the past few quarters compared to its more advanced peer countries, and some Turkish banks lack transparency when it comes to reporting the full extent of their asset-quality deterioration,” it added.

The rater also expressed fears for the Turkish and insurance sectors.

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