Turkey’s economic growth outlook stronger: Moody’s

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Turkey’s economic growth outlook is still stronger than that of the largest developing economies, a senior figure from Moody’s ratings agency told Anadolu Agency on March 2.    

“We affirmed Turkey’s rating at Baa3 with a negative outlook in December [2015],” said Alpona Banerji, Moody’s vice president and senior credit officer.

“The first pillars that drove the affirmation are the size, strength and the diversity of its economy, and the fact that its growth prospect relative to other large emerging markets still remains robust,” she added.

Banerji said the ratings agency expected Turkey’s growth in 2015 to reach almost 4 percent and 3.4 percent for the year.

This would be based on “the strong carry-over effect from last year, the consumption growth driven by the minimum wage increases and some support from net export contribution driven from trade with Europe,” she added.

Banerji listed other factors supporting Moody’s rating affirmation as being “Turkey’s fiscal metrics” like its debt-to-GDP ratio, which has been stable and is expected to stand at 34 percent for last year.

Banerji pointed out some of the factors which were challenging the Turkish economy, such as “the large current account deficit” and “geopolitical risk.”

“Geopolitical risks remain, and the spillover is domestic security issues that might have an impact on tourism, the confidence channels and consumption… This could be a drag on economic growth….  Though there has been a little rebalance from the current energy and commodity price environment, Turkey’s current-account deficit is still large compared to other emerging markets with the country quite vulnerable to global market changes [and] investor perception towards emerging markets,” Banerji said.

However, she pointed out that Turkey’s current account deficit has been rebalanced from a peak of 7.9 percent of GDP in 2013 down to 4.5 percent of GDP in 2015.

“There has been a substantial rebalancing on [the] current account deficit mainly led by the oil price decline, but capital account financing remains volatile and a vulnerability,” Banerji said.

Oil prices have fallen 65 percent since mid-2014, from $115 a barrel in June 2014 to below $30 per barrel in 2016 (now $36.41 per barrel) reaching their lowest level in seven years, and recording the most rapid decline since 2008.

According to Banerji, inflation – which Moody’s expects at 8 percent at the end of the year in Turkey – remains above the 5 percent target set by the Central Bank due to depreciation in the Turkish Lira against the dollar, high food prices and minimum wage increases.


Currency ‘to remain weak against dollar’

“As a result, there is more upward pressure on inflation. Our view is that the currency will remain weak against the U.S. dollar for at least the next 12 months,” Banerji said.

The inflation rate in Turkey rose by 1.82 percent in January due to high food costs, lifting the annual inflation rate to 9.58 percent. Turkey, in the beginning of 2016, raised the minimum wage by 30 percent to 1,300 liras ($430) for over 5 million workers.

Moody’s now expects Turkey’s real GDP to grow at 3.4 percent this year and 3.2 percent for 2017.

“Minimum wage increases are one of the reasons why we expect growth in 2016 to be around 3.4 percent… While the contribution from the minimum wage increases could mean more upside for growth in 2016, there are also other continuing downside risks; e.g. the escalation of the geopolitical risk which could affect tourism more than anticipated or affect confidence channels where people refuse to spend,” Banerji noted.

Banerji recalled Moody’s recent latest downgrade of Brazil’s rating by two notches from Baa3 to Ba2.

“This was mainly driven by the fiscal side, which is vastly different to Turkey’s,” she said.

“Turkey’s debt-to-GDP ratio is stable at 34 percent of GDP, and in contrast Brazil’s was expected to reach 66 percent of GDP last year and to grow further… That would give you a sense of where Turkey is positioned compared to Brazil, which is now below investment grade,” she said.

“Another differentiating factor is that Brazil’s growth outlook is not as strong as Turkey’s. The other emerging market that shares the same category with Turkey is India, which is growing much faster than Turkey, but has different fiscal challenges,” she added.

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