Jan 02 2019

Substantial downside risks to Turkey’s economic stability – Seeking Alpha

Capital inflows may be returning to Turkey after a currency crisis abated, but there are still substantial downside risks to overall stability, according to an analysis published by Seeking Alpha.

There is a low level of international confidence in Turkey’s economic policy-making, meaning another crisis, as happened with the United States during the summer, could again trigger economic and financial instability, Seeking Alpha reported.

“The just-announced U.S. withdrawal from Syria may reignite regional violence, a major U.S. fine against the Turkish banking sector and the Iranian sanctions are all potential triggers,” it said. “Of greatest concern, though, is with the country on the verge of a recession, President {Recep Tayyip} Erdoǧan may be tempted to abandon stabilisation policies in pursuit of stimulating growth, launching another crisis.”

With Turkey due to hold nationwide local elections in March, quarterly economic growth has swung negative, according to third quarter data. That performance may have continued in the final three months and could persist into 2019, economists say.

Crisis in Turkey is also more likely as the Federal Reserve raises interest rates while the Turkish central bank leaves its own rates unchanged, or indeed lowers them on Erdoǧan’s direction, according to the report.  

Still, Turkey attracted net inflows of portfolio investment for the first time since January during the month of October. The positive capital swing demonstrates a slow return of investor confidence. The current account deficit has also narrowed substantially as imports shrank. Inflation has slowed from a 15-year high.

Turkey’s external financing gap still remains substantially large even as the current account deficit narrows. The government will need to continue to garner more investor confidence in order to prevent any shortfall in much-needed funds.