Turkey: Recession threat looming? – ABN AMRO

According to analysts at ABN AMRO, lira weakness is not over yet as capital outflows will continue, which could result in a further drop in the currency of around 20%, which means a USD/TRY of around 8.2.

Key Quotes

“We expect inflation to trend upwards in the coming months, from a current level of around 18% to 21% at the end of this year. While declining consumption will push inflation down, higher import inflation will partly reverse this trend. We expect inflation to come down to 8% end-2019.”

“According to the IIF, the drop in credit this quarter is even bigger than during the crisis in 2008/2009. This will weigh on activity, as Turkey’s growth is largely stimulated by credit growth. Imports will decline on the back of lower consumption and production.”

“Exports may increase because the lira made Turkish exports relatively cheap for the rest of the world. However, as Turkey has a large import component in its exports and is dependent on oil and commodity imports, we do not expect the current account to turn positive.”

“Lower growth and a weaker currency, on balance, will make it difficult for certain companies to fulfill their external debt obligations. The non-financial corporate sector is directly in the line of fire and we expect restructuring and default rates to rise substantially.”

“In particular, companies with large foreign currency debt, but that only receive part of their earnings in foreign currencies, will be under pressure. Most likely this will lead to a more abrupt and more pronounced contraction of the economy.”

“In light of these factors, we expect Turkey to face a recession in 2019. We therefore adjust our growth forecast from 2% yoy to -3% in 2019.”