Warnings to Turkey for 2018 from World Bank and rating agencies

Statements from the World Bank and rating agencies were made over the weekend regarding Turkey’s economic performance. I believe it would not be wrong to read these statements as “Economic warnings for 2018 from international economic circles.”

If we were to summarize, they recalled recovery in the world economy and that Turkey reached a very high growth rate beyond this economic recovery in 2017.

It underlined that recovery in the global economy would continue but for diverse reasons, Turkey’s growth rates would drop. It also added reviving domestic demand by the Credit Guarantee Fund (KGF) played a major role in this year’s growth, but that monetary and financial means would no longer be at the level of supporting growth.

Important deviations in inflation were observed, caused by domestic demand and rising oil prices. Another point made by these statements is that inflation poses one of the most important risks in 2018.

In view of the existing external fragilities, as long as these fragilities are not eliminated and important structural measures are not put into practice and institutional changes are not made, expectations about the Turkish economy will not turn into positives according to these statements.

In this framework, there is no probability in sight for a rise in Turkey’s rating, which has gone below investment grade and there is even danger for a further drop in the country’s credit rating.

These warnings that have started just ahead of New Year’s Eve, look set to continue through 2018, starting early on in the first months. Even if the bad news expected by domestic and foreign policy might not materialize, we will need to be accustomed to these warnings from now on based on economic figures.

We can be confident in saying the current warnings are smooth in terms of rhetoric and are not at the level of effecting markets.

Yet, the warnings that will come in the New Year will carry potential in terms of dosage and timing for deeply affecting markets.

Inflation stands as a great risk in 2018

Turkey country director for the World Bank Johannes Zutt, who does not speak with the press very often, also gave a statement.

“Considering external fragilities, domestic inflationist pressure and the erosions seen lately in the financial sphere and limitations in the country’s financial and monetary sources that will back the economy, it is projected that the growth that has seen a rise in 2017 will slow down next year,” said Zutt.

“The current macroeconomic environment and projected external conditions [rising energy prices and monetary tightening in the United States and Europe] will require monetary and fiscal discipline,” Zutt added.

He underlined sound macroeconomic policies need to be accompanied by deeper structural reforms to ensure a more sustainable economic growth over the medium term for Turkey.

“Since we currently have a negative outlook on Turkey’s rating, an upgrade is unlikely,” Kristin Lindow, senior vice president and sovereign analyst at Moody’s, told Şebnem Turhan from daily Hürriyet.

“However, a change could happen if there are structural shifts in these vulnerabilities or material improvements in Turkey’s institutional environment or competitiveness,” she said, according to the news article published on Dec. 25.

In view of the latest regulatory decrees and dangers in foreign policies, do you think Turkey will have the will to mitigate vulnerabilities, improve the institutional environment and maintain fiscal and monetary discipline while heading towards twin elections in 2019?