Our models suggest economic growth will stay strong in the foreseeable future in Turkey: 6-7% in 2018 on par with last year. The lagged effects of the weaker lira, the strong global economy and cheap funding as well as years of abundant credit are the key ingredients of this performance. However, some cracks are beginning to show and while it is difficult to time the next downturn – as much will depend on the global economy – some indicators should be monitored closely from now on. First, borrowing costs are rising, while wage growth lags expectations. The affordability of mortgages is falling rapidly. Secondly, funding for the current account deficit is becoming less stable, particularly in the “other investment” segment, which signals that multinationals are beginning to retreat. Thirdly, non-financial corporations have accumulated a sizeable amount of debt in recent years and the net financial balance (financial assets minus debt) has reached a shortfall of over 50% of GDP – a level that from an international perspective begins to ring alarm bells for the health of the business sector.
We expect 2018 to be another year of contradictions: GDP growth will stay strong, but fundamentals will get even more frail and it is only a matter of time before the banking sector will start suffering rising NPLs. #ChangingTurkey