Turkish economy likely saw strong bounce-back in Q3


Turkey’s economy likely had a strong bounce back in the July-September quarter as it was boosted by both normalization processes and loan growth supported by loose financial conditions, according to surveys and experts.

The pandemic, which led to a year-on-year contraction of 9.9% in the second quarter when restrictions imposed to curb the coronavirus hit hardest, eased in the third quarter as Ankara reopened the economy and lifted most measures as of June.

Turkey will receive good news about its economic recovery as the reading of the third-quarter gross domestic product (GDP), to be released Monday, is expected to show a growth of up to 5%, according to surveys.

“Similar to other economies, the GDP growth in Q3 bounced back strongly after various restrictions related to the coronavirus pandemic were removed,” Piotr Matys, emerging markets FX strategist at Rabobank, told Daily Sabah.

Even though multiple polls had earlier predicted a contraction in the third quarter, expectations turned positive after data indicated a more forceful performance.

The median estimate of 14 economists in a Reuter’s poll forecast growth of 4.8%. Estimates ranged between an increase of 6.8% and a contraction of 1.5%. An October poll of 48 economists had predicted a contraction of 2.6%.

Earlier surveys projecting a contraction can be attributed to substantial uncertainty caused by the outbreak, Matys said. “It was extremely difficult to predict the scale of recession which mainly depended on restrictions and how long they lasted.”

Similarly, Enver Erkan of Tera Yatırım also said the concern of downside risk to economic activity by the increase in COVID-19 infections and possible restrictions had been monitored.

“But during the entire Q3 period, economic activity remained at the stage of normalization and recovery,” Erkan told Daily Sabah.

An Anadolu Agency (AA) survey of 17 economists expects a 5% year-on-year growth, with estimates hovering between 3.5% and 6.8%.

In addition, ING also said the July-September quarter would show a continued solid recovery. It expects Turkey’s GDP to have risen by 4.5% year-on-year.

President Recep Tayyip Erdoğan himself recently said strong growth in the third quarter is definite thanks to September’s promising data.

The outbreak’s October and November resurgence has prompted Ankara to adopt new curfews for weekends and for certain age groups, as well as limit the working hours of some businesses, including restaurants, cafes and shopping malls.

The government has emphasized that the measures, much less restrictive than those in the spring, will not interfere with supply and production chains.

“I believe we’ll end the year with positive growth, despite the ongoing challenges due to the coronavirus outbreak,” Erdoğan said.

The second wave is said to likely have a much more limited impact on the economy compared to the first because the restrictions are designed to allow economic activity to continue.

Ankara sees a growth of 0.3% this year but has said a contraction of 1.5% is possible under a worst-case scenario. It projects a rebound of 5.8% in 2021.

For the full year, the median estimate in the Reuters poll was for the GDP to remain flat, with estimates of 16 economists ranging between 0.6% growth and 5% contraction.

The economists in the AA survey predicted annual growth of 0.3% with estimates hovering between 0% and 1%.

Recovery in business activity

The easing of restrictive measures and the initializing of financial normalization since the end of the second quarter has had a positive impact on economic activity and a rapid recovery was seen in business activity data, Erkan said.

“Leading indicators such as industrial production, (the purchasing managers’ index) PMI and sectoral confidence indices showed that this effect continued throughout the third quarter,” he said.

He particularly stressed industrial production, which shows the closest correlation with the growth series.

“In light of the recently announced September data, it is seen that there is an increase of 7.7% compared to the same period of the previous year. Industrial production increased by 30.3% compared to the previous quarter,” Erkan said.

Loosened financial conditions and the acceleration of bank loan growth by regulators in the July-September quarter have also supported the increases, he added.

Yet, he warned of side effects. The fact that the loan growth had a greater impact on demand than on investments also had an increasing effect on the current account deficit by accelerating imports, Erkan said.

“However, as the most important side effect felt was the depreciation of the Turkish lira depreciated as price stability deteriorated and inflation was fuelled. Currently, traditional and tightening policies have been implemented in efforts to reduce this effect with priority given to price stability,” he noted.

In light of all these, Erkan said they expect a strong, double-digit quarter-on-quarter growth and a 3.5% year-on-year increase in the July-September period.

Erkan also warned that an increase in COVID-19 infections and new restrictions could create downside risks on economic activity.

“We anticipate that the demand effect will diminish in the fourth quarter with the tightening of financial conditions. Therefore, the quarter will point to a slower growth picture. We foresee 0% growth for the whole year, and we think there may be a slight deviation range above or below this,” Erkan noted.

Normalization process

To strengthen the perception of a new era after Erdoğan’s recent pledges for comprehensive reforms in the economy and judiciary, Turkish authorities have begun to meet market expectations by taking multiple normalization steps.

The process began after the Central Bank of the Republic of Turkey (CBRT) on Nov. 19 raised its key policy rate by 475 basis points to 15%, up from 10.25%, and pledged to remain tough on persistent double-digit inflation, which has been stuck near 12%.

After its sharpest monetary tightening in more than two years, the bank also simplified its monetary policy by saying that all funding will be provided through the main policy rate.

“We see that decisions are being taken one by one to support the perception of the normalization process, which began with the central bank simplifying monetary policy,” said Erkan.

“From the perspective of economic policy, it is important that price stability is being brought forward,” he noted. “In the future, we expect policy communication to continue in this way.”

He also referred to last week’s decision by the Banking Regulation and Supervision Agency (BDDK) to halt the calculation of banks’ asset ratios at the end of the year and the CBRT’s move to scrap a rule that had nudged banks ramp up cheap lending, saying that these positively contribute to the process.

The BDDK’s move repealed resolutions set earlier this year that effectively led to private banks both lending more and buying more government debt to protect the economy from the fallout from the pandemic.

The CBRT’s move was another step to simplify and tighten credit channels after hiking rates.

The bank had previously linked reserve requirement ratios and remuneration rates to loan growth, which had spurred lending and economic growth.

The same reserve requirement ratios and remuneration rates will now be applied to all banks, which the central bank said should make its monetary transmission mechanism more effective.

“All those decisions confirm that the CBRT is fully committed to restoring confidence among investors by shifting toward orthodox monetary policy and moving away from policies that fueled credit growth,” says Matys.

He also stressed that at some stage, pledges to improve the investment climate will not prove sufficient for the Turkish lira to maintain its bullish momentum.

“It is, therefore, crucial that constructive remarks are followed by concrete measures to put the economy on the path of stable growth absent of substantial current account deficit and high inflation,” Matys noted.


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