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
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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.


Tesla rolls out Model 3 in China ahead of schedule in sales push

Updated 54 min 32 sec ago
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Tesla rolls out Model 3 in China ahead of schedule in sales push

  • The initial deliveries will go to customers who placed their orders before the end of 2018
  • Tesla currently imports all the cars it sells in China, but is in the process of building a factory in Shanghai

BEIJING/SHANGHAI: Tesla has started delivering Model 3 cars in China slightly ahead of schedule, as it looks to revive its sales that have been hit hard by Sino-US trade tensions.
The California-based firm has already adjusted prices and added a cheaper Model 3 variant to its line-up to make its US-made cars more affordable in China amid high import tariffs.
The US luxury electric vehicle said in a statement that it held a delivery event in Beijing on Friday which “marked a significant milestone for the market.”
It had initially projected a March start for Model 3 deliveries in China — the world’s biggest auto market where overall car sales contracted in 2018 for the first time in more than two decades.
The initial deliveries will go to customers who placed their orders before the end of 2018, Tesla said. Buyers that ordered this year will start receiving their cars from end-March.
“I see its earlier-than-expected delivery as an effort to try and seize the market as quickly as possible” amid mounting competition, said Alan Kang, an analyst at LMC Automotive.
“Many of its potential customers will not only be considering Tesla’s Model 3 but also other electric car models like Jaguar’s I-PACE or that from Audi and Mercedes-Benz,” the Shanghai-based analyst added.
While auto sales in China have waned as the economy slowed, Tesla’s business was hit hard after Beijing raised tariffs on US auto imports to 40 percent in July amid the trade tensions. China has since temporarily suspended the additional 25 percent tariff, reducing it to the 15 percent level.
Tesla currently imports all the cars it sells in China, but is in the process of building a factory in Shanghai that will manufacture Model 3 cars in the initial phase and help it minimize the impact of the trade war.
The United States and China are in the midst of talks aimed at resolving their trade dispute. If the two sides fail to reach an agreement by March 1, US tariffs on $200 billion worth of Chinese imports are set to spike to 25 percent from 10 percent.
Tit-for-tat tariffs between the world’s two top economies have upended international trade flows.
Tesla’s earlier-than-scheduled delivery, however, comes as the automaker was dealt a setback on Thursday after Consumer Reports, an influential US magazine, withdrew its endorsement for Model 3, citing reliability problems.
The magazine’s decision to withdraw its endorsement, less than nine months after recommending the electric sedan, raised questions about quality that Tesla has faced since the Model 3’s difficult launch.