Moody’s warns of overheating as Turkey economic forecast raised

Turkey’s government may overheat the economy as it chases an ambitious economic growth forecast of 5 percent next year, ratings agency Moody’s said.

The country’s recovery from a currency crisis in 2018, which provoked an economic recession, is stronger than expected, but aggressive stimulus and the possibility of U.S. sanctions pose risks, Moody’s said in a report on global growth published on Thursday.

“Risks to Turkey’s cyclical recovery stem from overly aggressive easing,” Moody’s said. “The New Economic Programme sets aggressive growth targets of 5 percent between 2020 and 2022, much higher than our forecasts.

“The economic stimulus required to boost economic growth to 5 percent could once again lead to overheating, widen current-account deficits and exert upward pressure on inflation,” it said.

Turkey’s government provided significant stimulus to the economy in the lead up to last year’s currency crisis, including cheap restructured lending for the nation’s businesses. Those measures contributed to a slump in the lira to a record low last August, a decline immediately preceded by the imposition of economic sanctions by the United States for the detention of a U.S. pastor on terrorism charges.

Moody’s raised its 2019 growth forecast for Turkey to 0.2 percent and estimated the economy will expand by 3 percent in 2020 and 2021.

“While the economic recovery has been stronger than expected, the underlying issues, especially reliance on external funding and dollarisation, remain unaddressed,” Moody’s said.

A government-ordered credit expansion by state-run banks bolstered confidence and stimulated activity in some sectors, but others remain weak, including construction and manufacturing, where significant unsold inventories remain, the ratings agency said.

Fixed investment has fallen sharply, contracting by 22.9 percent annually in the second quarter after a 12.4 percent decline in the first three months, Moody’s said.

Rapid disinflation continues to provide room for the central bank to lower interest rates, according to the ratings agency.