Jan 09 2019

Turkey should introduce comprehensive stabilisation package – World Bank

The World Bank said Turkey should consider implementing a comprehensive stabilisation programme as the outlook for its economy remains considerably uncertain.

Economic growth in the country is expected to slow to 1.6 percent in 2019 from 3.5 percent last year, the World Bank said in its Global Economic Prospects report published late on Tuesday.

While Turkish growth is expected to begin recovering in 2020, “this outlook assumes that fiscal and monetary policy successfully avert further sharp falls in the lira and, that corporate debt restructurings help avert serious damage to the financial system,” the bank said.

“A comprehensive stabilisation package with consistent policy framework, clear milestones, and effective communication would help reduce risks and support recovery.”

Turkey’s economy shrank by 1.1 percent on a quarterly basis in the three months to September. The contraction came about as investors sold Turkish assets due to fears over economic overheating and a political crisis with the United States. The central bank raised interest rates in September to stem a currency crisis, but concern remains over government interference in monetary policymaking as the economic downturn persists.

In 2019, Turkey is expected to be weighed down by high inflation, high interest rates and low confidence, which will dampen consumption and investment, the World Bank said.

Spill-overs from Turkey to Europe and Central Asia will remain modest as trade and financial links are relatively modest, the World Bank said.

“The most important downside risk is the possibility that the recent financial stress in Turkey worsens and triggers widespread bank failures. Turkish corporations carry significant debt, much of which is denominated in or linked to foreign currencies,” the bank said.

“Currency depreciation and high interest rates could push corporate borrowers into bankruptcy and depleting banks’ capital buffers. Renewed pressure in currency markets and increased uncertainty about the policy framework would increase the probability of a deepening crisis, implying a longer and more severe slowdown than currently forecast for Turkey.”

The lira slumped by almost a third against the dollar last year, hitting a record low of 7.22 per dollar in August. It traded 0.3 percent lower at 5.49 per dollar on Wednesday, taking losses in January to 3.8 percent.

Local elections in March are raising concern among some investors that the central bank will lower interest rates prematurely from the current 24 percent. Consumer price inflation has eased to 20.3 percent in December from a 15-year high of 25.2 percent in October. Turkish President Recep Tayyip Erdoğan is a vociferous opponent of high interest rates, claiming they are inflationary.