By NEWS DESK
Fitch Ratings has revised its 2021 growth forecast for Turkey “significantly” to 6.7% from 3.5% in December. The decision reflects the strong growth carryover from 2020 as well as continuing effects of high credit growth in 1H21, the rating agency said in the Global Economic Outlook Report for March, on Tuesday.
“Turkey’s economy expanded by 1.8% in 2020, surpassing our 0.2% December GEO forecast and joining China as the only other Fitch 20 economy to record growth for the whole year,” said in the report. After the sharp recovery in 3Q20 fuelled by credit and monetary stimulus, Turkey surprisingly maintained sequential growth momentum at 1.7% in 4Q20 compared the third quarter, accoding to Fitch Ratings. “Household consumption, government spending and net trade all contributed to growth,” it said.
‘Economy to slowdown in the second half’
“We have revised up our 2021 forecast significantly to 6.7% (from 3.5% in December) reflecting the strong growth carryover from 2020 as well as continuing effects of high credit growth in 1H21,” said in the report. However, Fitch Ratings expects the economy to slow in 2H21 due to tighter monetary and credit conditions and a more conservative fiscal stance, with an announced revision in the budget deficit to 3.5% from 4.3% of GDP. “Reduced policy support will balance the impact of improving external demand and the easing of local restrictions in line with progress in vaccinations. Our 2022 forecast of 4.7% is in line with our expectation that the economy will move closer to a growth trajectory consistent with our assessment of growth potential (4.3%).”
Inflation to ease to 11.5% by end-2021
Strong monetary and credit stimulus, while supporting growth resilience in 2020, led to high inflation of 14% at year end, according to the report. “Cost pressures due to the pandemic and the 2020 depreciation of the Turkish lira, rising international food and energy prices, and still- high inflation expectations continue to exert upward pressure on prices, and the rate of inflation annually rose to 15.6% in February.” Although the agency expects inflation to ease to 11.5% by end-2021 and further to 9.2% by end-2022, these remain above the central bank’s forecasts of 9.4% and 7%, respectively.
“Lira to remain volatile”
“The new management at the central bank tightened policy significantly in 4Q20, taking the policy rate to 17% – and provided forward guidance that policy will remain tight to achieve a sustained decline in inflation. As a result, we forecast only gradual policy easing starting in late-2021,” said in Fitch Rating’s report.
The agency also expects the lira to remain volatile but to end this year at a broadly similar rate to late-2020, hence adding little to inflation. “A tight monetary policy stance and reduced current account deficit will weigh against changing global investor sentiment as well as continued concerns regarding the sustainability of the current orthodox policy mix.”
