Turkey will enjoy a reprieve from economic turbulence in 2020. There will be more government spending and interest rate cuts to ensure the economy gets somewhere close to President Tayyip Erdogan’s growth target of 5 per cent for the year. Yet inflation may well remain under control. The reckoning will come later.
The government’s growth goal appears punchy at first glance given the economy is expected to grow at a tenth of that rate in 2019. But the economy will have tailwinds. First, Murat Uysal, who was appointed the head of the central bank in July, is proving more amenable to monetary easing than his predecessor. He has already cut the main policy rate by 12 percentage points between July and December to 12 per cent. More rate reductions are likely in the coming year. Public spending will also play its part with the government expecting to run a budget deficit of 2.9 per cent of GDP in 2020 and 2021.
Expansionary policies may push up consumer prices, which rose 11 per cent in November from a year earlier. Even so, the relative stability of the lira means that inflation will be less than half of its 2018 peaks. Inflation surged to almost 25 per cent that year as steep falls in the local currency pushed up the price of imported goods. But tactics such as foreign exchange curbs and state banks withholding lira liquidity helped the currency hold its ground in 2019, even in the face of geopolitical drama. These defences will probably continue to be deployed.
Vulnerabilities may, however, gradually build up over the course of the next 12 months. State banks are lumbered with non-performing loans and Turkish companies’ foreign-currency exposure is sizable with almost $180 billion more in liabilities than assets as of September. Meanwhile, investors suspect that official reserves have been flattered by the use of swaps and that the central bank’s efforts to support the lira have taken a bigger toll on the foreign-currency war chest than the public numbers suggest. If strategies to support the lira start becoming less effective, the central bank will be forced to reverse some of its easing. Given he is seeking re-election in 2023, Erdogan’s short-term pursuit of growth at any price may backfire.