US rating agency Standard & Poor’s (S&P) issued a warning that consumption will shrink in real terms in Turkey. S&P announced that temporary tax cuts are expected to be terminated after the 31 March local elections, and the Turkish economy will continue to contract.
S&P’s warning was followed by Turkish Statistical Institute’s (TUIK) March 11 national accounts data release which showed that the industrial production fell by an annual 7.3 percent and Turkey entered a recession at the end of 2018.
The rating agency detailed that the growth forecast was realized in 2018 but this year, the economic contraction will continue to affect markets in Turkey.
“We maintain our view that Turkey is going through a stagflation adjustment following last August’s currency crisis. An economic contraction typically follows a sudden reversal of balance-of-payments flows and Turkey has proven no exception to this rule.” S&P reported that Turkey is currently facing similar trends in the 2001 and 2009 economic crises.
Strong export performance and tourism revenues will provide some relief
“Domestic demand will be the key weakness with investments continuing to contract amid tighter international financing conditions, a higher foreign-exchange debt burden due to a weaker Lira, and elevated Lira interest rates,” S&P concluded aftermarket analysis. According to S&P, stronger export performance – especially in tourism – should provide some respite to the troubled Turkish economy.
S&P also forecasts that weaker growth in the Turkish economy is likely to undermine banks’ asset quality, with loans increasing and reaching double digits over the next two years. “We forecast the full year general government deficit will reach 3% of GDP,” estimated S&P.