Turkey inflation ‘to hit 20%’

The cost of living in Turkey has soared as imports became more expensive due to the lira crisis. (AP)
Updated 26 August 2018

Turkey inflation ‘to hit 20%’

  • S&P Global forecasts sharp contraction in country’s economy next year
  • Turkish currency went into free-fall at the beginning of the month

DUBAI: Turkey is facing the prospect of a leap in inflation this year and a sharp contraction in its economy in 2019 as the country’s currency crisis continues, according to analysts at S&P Global.

The Turkish currency went into free-fall at the beginning of the month when Donald Trump, the US president, imposed economic sanctions over a political dispute, hitting a record low of 7.24 lira to the dollar. It has crept up slightly since, but the long-term effects of the crisis are still emerging.

“The exceptional volatility of the lira exchange rate over the past two weeks and a significant tightening of both external and domestic financing conditions, as well as a broader decline in confidence will, we believe, undermine the Turkish economy,” S&P said in a research note.

“We project that after average growth of more than 5 percent over the past three years, the economy will contract by 0.5 percent in 2019, with both consumption and investments reducing sharply, the latter by a projected 6 percent. At the same time, we project that inflation will peak at above 20 percent and the unemployment rate will rise to 12 percent next year,” S&P, the US agency that rates countries’ and corporates’ creditworthiness, added.

The government of President Recep Tayyip Erdogan has blamed the Americans for the crisis, accusing it of waging “economic war” on his country and refusing to raise interest rates or open talks with the International Monetary Fund for financial assistance.

As the crisis unfolded, Qatar promised funds to arrest the slide in the lira and bring liquidity back to the Turkish financial system, with a suggested $15 billion package of support. Economists — still awaiting full details of the Doha offer — expressed doubts this will be enough to arrest the decline.

S&P said: “If implemented, the $15 billion support package could provide some support to the Turkish economy. However, details remain scarce and we understand the financing will likely come over a number of years rather than be front-loaded.

“It is also unclear whether some of the investments included represent net new financing as opposed to ongoing undertakings previously agreed between the two governments. Finally, we believe that Qatar’s support will likely come with limited economic conditionality and not require Turkey to address the root causes of current balance-of-payments stress,” S&P said.

There have been fears that the Turkish crisis could have broader repercussions for the global economy, especially in Europe where many bank creditors are domiciled.

Jason Tuvey, Middle East economist at London-based Capital Economics, said in a recent recent research note: “The plunge in the lira which began in May now looks certain to push and may well trigger a banking crisis. This could be another blow for emerging markets as an asset class, but the wider economic spillovers should be modest, even for the euro zone.”

S&P, in line with other credit raters, already downgraded Turkey’s creditworthiness to “junk” levels even before the crisis intensified with the US sanctions, raising concerns about the resilience of the country’s banking system.

“The sharp depreciation of the lira is increasingly hampering Turkish private-sector borrowers’ ability to repay their debt, a large portion of which is in foreign currency and owed to Turkish banks,” S&P said.

“In our view, the institutional framework has weakened in Turkey over the past few quarters compared to its more advanced peer countries, and some Turkish banks lack transparency when it comes to reporting the full extent of their asset-quality deterioration,” it added.

The rater also expressed fears for the Turkish and insurance sectors.

‘Get prices down’ Trump tells OPEC

Updated 20 September 2018

‘Get prices down’ Trump tells OPEC

  • Trump highlights US security role in region
  • Comments come ahead of oil producers meeting in Algeria

LONDON: US president Donald Trump urged OPEC to lower crude prices on Thursday while reminding Mideast oil exporters of US security support.
He made his remarks on Twitter ahead of a keenly awaited meeting of OPEC countries and its allies in Algiers this weekend as pressure mounts on them to prevent a spike in prices caused by the reimposition of oil sanctions on Iran.
“We protect the countries of the Middle East, they would not be safe for very long without us, and yet they continue to push for higher and higher oil prices!” he tweeted.
“We will remember. The OPEC monopoly must get prices down now!”
Despite the threat, the group and its allies are unlikely to agree to an official increase in output, Reuters reported on Thursday, citing OPEC sources.
In June they agreed to increase production by about one million barrels per day (bpd). That decision was was spurred by a recovery in oil prices, in part caused by OPEC and its partners agreeing to lower production since 2017.
Known as OPEC+, the group of oil producers which includes Russia are due to meet on Sunday in Algiers to look at how to allocate the additional one million bpd within its quote a framework.
OPEC sources told Reuters that there was no immediate plan for any official action as such a move would require OPEC to hold what it calls an extraordinary meeting, which is not on the table.
Oil prices slipped after Trumps remarks, with Brent crude shedding 40 cents to $79 a barrel in early afternoon trade in London while US light crude was unchanged at about $71.12.
Brent had been trading at around $80 on expectations that global supplies would come under pressure from the introduction of US sanctions on Iranian crude exports on Nov. 4.
Some countries has already started to halt imports from Tehran ahead of that deadline, leading analysts to speculate about how much spare capacity there is in the Middle East to compensate for the loss of Iranian exports as well as how much of that spare capacity can be easily brought online after years of under-investment in the industry.
Analysts expect oil to trend higher and through the $80 barrier as the deadline for US sanctions approaches.
“Brent is definitely fighting the $80 line, wanting to break above,” said SEB Markets chief commodities analyst Bjarne Schieldrop, Reuters reported. “But this is likely going to break very soon.”