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Turkey: Steady depreciation risks

Economic activity has softened somewhat in recent months, but not enough to affect our real GDP growth expectation for this year, which is likely going to be around 6%. The biggest unknown at this stage is the strength of imports, which detract from GDP.

Our fundamental concerns around Turkey’s growth model, which in our view is showing too fast accumulation of debt in the non-financial corporate sector and probably excessive house price inflation, remain. However, meaningful economic slowdown in our view will remain linked to the global business cycle, which for now is going through a soft patch, not a clear cut downturn.

This month we looked more closely at the changes in competitiveness taking place in Turkey. According to the Global Competitiveness index of the World Economic Forum, overall Turkey has made small progresses in the last ten years, particularly in technological readiness.

Our view on the lira remains negative, as given the current pace of growth, the trade deficit is likely to continue to widen while funding is tight notwithstanding renewed portfolio inflows. According to our models, which should be seen only as guidance, the trade deficit (everything else kept equal) would stabilize only if the lira weakens to 5.5 against the dollar.

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