After Goldman Sachs, Bloomberg Economics, too, revised its Turkey 2021 forecasts. Bloomberg expects higher inflation and lower growth. Goldman and Bloomberg are the first two in a long line of frustrated institutions scrapping their bullish 2021 Turkey predictions after the firing of CBT governor Naci Agbal. Turkey’s daily Covid-19 cases soaring to 37K, a very shaky currency undermining corporate solvency and economic confidence and the specter of delayed vaccination campaign killing summer tourism season could lead to further downward revisions.
By Ziad Daoud (Economist)
(Bloomberg Economics) — The unexpected firing of Naci Agbal as central bank governor sends a clear message about the direction of policy: growth-at-all-costs will be pursued. Past performance suggests this will backfire. Growth is likely to end up lower, the lira weaker and inflation higher than if Agbal had been kept in his post.
* We’ve downgraded our 2021 growth forecast to 4.5%, from 6.3% prior to Agbal’s dismissal, and revised up our year-end inflation projection to 14.3% (11.2% previously).
* Rising U.S. yields, a weaker currency and higher oil prices may prevent the central bank from cutting rates in the second quarter and might even force backdoor tightening.
Long-Term Weakening of the Turkish Lira
* Changes at the central bank, capital outflows and dollarization among residents will likely result in a weaker lira. Foreign-exchange reserves are too low to counter these forces. At a minimum, the currency could fall to 8.50 against the dollar, the rate before Agbal took over at the central bank.
* The lira has been on a long-term decline since 2013 due to political interference in monetary policy, as well as persistently high inflation and current account deficit. These forces are still present and the trend might continue, pushing the exchange rate to 9.0 by year-end.
* Sharper than previously anticipated depreciation will push inflation higher. We expect price gains to settle at 14.3% at year-end.
New Look MPC
* Of the seven monetary policy committee members present at the March 18 meeting, three have been replaced. In addition to Agbal, Murat Cetinkaya (the deputy governor) and Omer Duman have also been removed.
* At face value, these changes signal a dovish turn. But rising U.S. yields, higher oil prices and lira depreciation will prevent rate cuts in the short term. Confirming this, the new governor, Sahap Kavcioglu, has stated that an April rate cut shouldn’t be taken for granted.
* Global conditions may even warrant a rate hike. If this happens it will probably be through the backdoor, despite the governor’s pledge to maintain a single policy rate. Any liquidity injection to support growth may take the form of directed long-term lending, rather than conventional rate cuts, at least until 2H20.
Growth to Slow
* Turkey had one of the fastest rebounds from the Covid recession — its GDP was 5% above the pre-virus peak in 4Q. It also had one of the worst-performing currencies last year, losing a fifth of its value. This unbalanced growth is set to continue.
* Growth will benefit from comparisons with an unusually deep slump in the middle of last year. If the economy were to hold at its 4Q20 level, these “carryover effects” would still deliver an annual expansion of 5.7% in 2021.
* We expect growth to reach 4.5% this year, falling short of the carryover effects. Tighter financial conditions and rising virus cases will probably lead to a slowdown in 2Q. These factors could persist into 2H20.
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