Turkey: Economy is now heading towards a recession – ABN AMRO

Nora Neuteboom, economist at ABN AMRO, points out that Turkey has been experiencing a decade-long, credit-led economic boom, largely funded by short-term portfolio flows from abroad, with strong domestic demand leading to a deteriorating of the current account deficit.

Key Quotes

“In August the lira then started falling sharply on the back of growing tensions between the US and Turkey over the detained US pastor, Andrew Brunson. Given the high current account deficit and high inflation, investor sentiment towards the country turned negative.”

“Fears then arose that Turkey would be unable to finance its external borrowing requirement and would need help from the IMF. The markets calmed down again in September after the diplomatic spat was resolved and the central bank of Turkey sharply increased interest rates. However, while the currency crisis has passed, the underlying vulnerabilities that caused this crisis have not fully disappeared.”

“A continued fall in TRY loans indicates a sharp deleveraging, which will further weigh on investments. This, in turn, will put more pressure on the asset quality of banks’ balance sheets. With a weaker currency and continued high inflation, the Turkish economy is now heading towards a recession.”