Turkey says economy will grow 5% without surge in trade deficit

(Story was updated with analyst in sixth paragraph, economic data in eighth, inflation in last.)

Turkey’s government said the economy will expand by 5 percent next year, though it predicted no upsurge in the trade deficit that has characterised its growth model in recent years.

The government has increased its 2020 economic growth forecast from a previous 3.5 percent, Treasury and Finance Minister Berat Albayrak said on Monday during a news conference to announce his latest economic programme.

The current account deficit, the most comprehensive measure of inflows and outflows of goods, services and capital, will be 1.2 percent next year after posting a surplus of 0.1 percent in 2019, Albayrak said. The current account will be in balance by 2022, he said.

For more than a decade, Turkey’s economic growth has been characterised by a high current account deficits because of the country’s heavy reliance on imports to meet consumer demand and to produce finished products.

The deficit widened to as much as 6.5 percent of GDP last year as economic growth surged, raising concerns for financial stability. A currency crisis then struck in August, slashing demand for imported goods and causing an economic recession.

"Numbers don't seem consistent, coherent," Tim Ash, senior emerging markets strategist at BlueBay Asset Management in London, said in e-mailed comments to clients. "Many people will question, given Turkey's track record, of getting 5% growth, and keeping the current account deficit at only 1.2% of GDP - without a major positive surprise from oil prices (lower)."

But Turkey’s government says it is now focusing on exports to drive economic growth in the future, rather than relying on a splurge in imports. It has heralded the decline in the current account deficit as a policy success.

Imports slumped by an annual 16 percent to $131.9 billion in the first eight months of the year, narrowing the trade deficit by 58 percent to $20.6 billion, data published by the government's statistics agency earlier on Monday showed. Exports rose by 2.6 percent to $111.4 billion.

Last week, state-run banks said they had slashed interest rates on car loans for domestically produced vehicles in a sign that the government may introduce more unorthodox policies designed to curb demand for imports.

In another controversial move, the central bank has slashed interest rates by 750 basis points to 16.5 percent since July, responding to government demands to lower borrowing costs. President Recep Tayyip Erdoğan maintains that higher interest rates stoke inflation, arguing against conventional economic theory. The IMF last week warned against further rate cuts saying they threatened an uptick in inflation.

Albayrak said the budget deficit will be 2.9 percent of GDP this year, in 2020 and in 2021. The government previously targeted a deficit of 1.8 percent of GDP for 2019, but the gap has widened markedly due to a surge in spending and below inflation increases in tax revenue despite the government drawing on tens of billions of liras in central bank funds.

Inflation is expected to slow to 12 percent this year and 8.5 percent in 2020, Albayrak said. Consumer price inflation stood at 15 percent in August.