Beware of JCR’s warnings about the Turkish economy!
Based on the loss of control of monetary policy, Turkey's economy in 2018 has entered a rebalancing process averting the May currency crisis at the very last minute through rate hikes Okmen added.
Japan Credit Rating Agency (JCR) Eurasia administrative council director Orhan Okmen who always speaks frankly about the Turkish economy, in a press brief last week stressed that Turkey’s economic growth model was not compatible with the current global trends. Thus, he argued economic slowdown was inevitable for the upcoming periods in Turkey. Okmen added that only restoring closer ties with the European Union (EU) could smooth the expected economic slowdown.
Based on the loss of control of monetary policy, Turkey’s economy in 2018 has entered a rebalancing process averting the May currency crisis at the very last minute through rate hikes Okmen added. The interest rate hike to rehabilitate the private sector’s weakening liquidity facilities that has high foreign exchange debt will further accelerate the ongoing slowdown in the economy according to Okmen.
He further stressed that if the rebalancing process cannot solve the hard currency need of the economy, the overall economic cycle, especially in the manufacturing industry, will turn into a contraction, despite high inflation after the second half. He warned that if interest rate hikes and fiscal discipline cannot coexist, rebalancing in the Turkish economy would not be successful.
Policies work in opposite directions
Okmen went on stressing that the basic challenge of the current conjuncture based on political risks was to push the financial stability and price stability towards the opposite directions. He underlined that Turkey’s current growth policy in practice does not comply with the dynamics of the current global environment: the economic policies designed for the global economic environment between 2002 and 2013, when the nominal interest rates were low and the TL was valued, would not respond to the current change of tide triggered by the Fed rate hikes.
The impacts of the deterioration in global economic cooperation and extravagant incentive system that has been introduced pushed Turkey’s economy into further difficulties according to the JCR Eurasia Director.
Referring to the Turkish companies’ debt restructuring demands, Okmen argues they are a crucial factor for banking sector stability. Putting it differently, he stresses that the problems encountered by the private sector in the rollover of foreign exchange debt have become an important risk factor in Turkey’s banking system.
Inflation will rise
Okmen offers strengthening the relationship established with the European Union (EU) and vitality of the US economy as factors that can soften the expected recession in Turkey’s economy as a result of the rising interest rates. He also notes that keeping the prices of some widely used goods and services artificially low and delaying repricing of deposits and credits will not provide permanent benefits to price stability at the macro level; and are useless attempts to prevent economic contraction.