May 20 2019

Erdoğan splurge may bring economic growth, then double-dip recession – FT

A splurge by Turkish President Recep Tayyip Erdoğan’s government looks set to offer only temporary respite to the country’s maligned economy, the Financial Times reported, citing economists.

Turkey’s fragile economy may re-enter a recession in the second quarter of this year after temporarily emerging from two-straight quarters of negative growth in the first three months, the FT said.

A surge in public spending, state-bank sponsored lending to businesses and consumers, tax cuts and employment incentives probably helped Turkey’s economy to post a quarter-on-quarter expansion in the three months to March. The figures will be published at the end of this month.

But economists say the bounce probably won’t last because the uptick was provoked by Erdoğan’s desire to win nationwide local elections on March 31.

Goldman Sachs is warning that likely economic growth of about 1.3 percent quarter-on-quarter at the start of this year won’t be sustainable.

Inan Demir, an economist at Nomura in London, said political uncertainty and financial market volatility is set to weigh again.

“It might be a sort of double-dip in economic activity,” Demir said, according to the newspaper.

The lira has lost more than 10 percent of its value against the dollar this year, pressuring inflation of almost 20 percent, preventing the central bank from cutting its benchmark interest rate of 24 percent and making it more expensive for companies to repay their foreign currency debts.

“Any further lira weakness will likely have a contractionary impact on activity through reduced corporate profits and the negative impact of lira weakness on business and consumer sentiment,” said Üğraş Ulku, an economist at the Institute of International Finance, the FT said.

Turkey could apply for International Monetary Fund loans to help it emerge from recession, implement structural reforms and to attract foreign investment, but Erdoğan has ruled out such a move.

Without IMF loans, the country could muddle through, but a mountain of corporate debt, including increasing non-performing loans, is hurting the banking industry, and hence the country’s economic and financial prospects.

“Until we clear out these problems, we can’t say the Turkish economy has hit the bottom yet,” said Selva Demiralp, a professor of economics at Istanbul’s Koç University.

https://www.ft.com/content/77174c52-77c5-11e9-be7d-6d846537acab