The years 2018 and 2019 were rough for Turkey.

With general elections in 2018 and local ones in 2019, a currency freefall and inflation racing to almost 25%, the authorities’ top priority was containing the scale of the ongoing crisis, rather than focusing on longer-term scenarios.
Back then the central bank TCMB responded to the shock with massive interest rate hikes: first in June 2018 by 9.75 bp to 17.75% and two months later - to 24%.

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Consequently, Turkey’s real GDP contracted by 2.8% y/y in Q4 2018, although the declines were reduced to 2.3% and 1.6% y/y in the following two quarters The Turkish lira weakened in 2018 by approximately 38% against the US dollar. In 2019 the depreciation was significantly milder, at 13%, but the lira was the second worst performing currency after the Argentinian peso. Since the beginning of 2020 up until February 17 the currency has weakened against the US dollar by 1.7%.

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As Turkey eventually returned and stayed on the path of recovery, in September 2019 the finance ministry published its New Economic Programme 2020 – 2022 (NEP), which envisages that the economy should return to 5% annual growth rate as early as in 2020, whereas in 2019 it is estimated to hover slightly above zero.

With finance minister Berat Albayrak announcing that the authorities achieved a “soft landing”, the NEP further projects that inflation will be brought down to just under 5% by the end of 2022, a balanced current account will be achieved by the same time, and the central government budget deficit to GDP ratio will be kept below 3%.

While further economic stabilisation is indeed to be anticipated in Turkey, it makes sense to consider whether the targets in the programme are too ambitious.

Economic Growth

After three quarters of contraction, Turkey’s GDP growth rate returned to positive territory, with the economy expanding by 0.9% y/y in Q3 and by 5% in Q4 2019. The targets set in the NEP 2020-2022 for the growth rate are more generous than the forecasts by the IMF and other institutions.

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The European Commission actually revised its autumn 2019 forecast for the growth rate in 2020 down by 0.8 pp compared to its spring 2019 forecast. Credit ratings agency Fitch raised Turkey’s outlook from negative to stable in November 2019, but left its BB- rating unchanged. The agency assumes that Turkey could experience greater stability in 2020, as the rebalancing of the economy continues. It points out that with no elections due until 2023 the year 2020 provides an opportunity for the implementation of reforms that will tackle structural credit weaknesses. Fitch acknowledges that the NEP contains some relevant reforms in that sense, but remains cautious regarding their implementation. One key question is how the 5% growth rate target is going to be achieved without a substantial increase in budget deficit.

The latter is projected not to surpass 3% of GDP which is optimistic, especially if the government would opt for stimulus packages in order to achieve its growth target. Further, current account deficit is expected to climb up to 1.2% in 2020, but decline in the following year and eventually reach zero in 2022. In December 2019 the current account posted a USD 2.8bn deficit.

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