Turkey: Strong growth and accumulation of imbalances in Q3 2017 - Natixis

Inna Mufteeva, Research Analyst at Natixis, notes that Turkish GDP posted a spectacular, above expectations rise of 11.1% Y/Y in Q3 2017 and suggests that positive base effects partly explain this performance, as economic activity of Q3 2016 was heavily affected by the coup attempt on 15 July.

Key Quotes

“Bolstered by the fiscal stimulus measures, with subsidies to households and a Credit Guarantee Fund for SMEs domestic demand contributed 11pts to the quarter growth. Both household consumption and investment (still driven by large public infrastructure projects) rose roughly by 12% Y/Y in Q3.”

“The contribution of net exports was slightly positive (0.3pp), thanks to a rise in exports (+17% Y/Y), and despite strong imports (+15%) sustained by rise in domestic demand.”

“This vigorous domestic demand as well as past depreciation of the Turkish lira pushed the core inflation to its historical high of 10%, while the headline inflation affected by the rise in food and energy prices hit 11% in 2017 (versus 7.8% in 2016), its highest level in more than a decade.”

“Given the significant upward pressure on prices, the CBRT raised the LLW (Late Liquidity Window) rate by 50bp. This rate has de facto become its main monetary policy instrument. The decision nevertheless disappointed the markets did not bring much support for the Turkish lira (it remained close to 3.8 against the US dollar). Meanwhile, markets are growing fears of currency crisis linked to the accumulation of considerable external imbalances by the country.”