Turkish economic growth likely to shrink in Q3 under emergency rule

The Turkish government has taken back control following the attempted military coup on July 15. However, the government declared an emergency rule for three months that is expected to be extended. The Turkish political scenario was already shaky since May 2016 after “President Erdogan took back “hands on” control of the government and revamped the cabinet,” stated Commerzbank in a research report.

Consumer and business sentiment in Turkey is expected to be impacted by uncertainty. This is then likely to dissuade investment activity. Tourism, which has already been under pressure from concerns of terrorism, is unlikely to rebound under the emergency rule. Lastly, longer-term economic outlook might be further impacted adversely if the government chooses to push though policies that might be viewed as “undemocratic” by western nations. This might then result in the end of the nation’s EU accession plans and make Turkey’s geopolitical future uncertain, said Commerzbank.

“Against this background, we revised our GDP growth forecasts further down to 3.0 percent for 2016 (and 2.1 percent for 2017), even though the re-start of exports to Russia (Q3) and expansionary monetary and fiscal policy will buffer the downturn to some extent”, added Commerzbank.

In the first half of this year, the Turkish economy has registered 4 percent plus growth already; however, the economy is expected to shrink on sequential basis in the third quarter and register a record near-zero growth again in the fourth quarter.

Ratings agency, Standard & Poor’s has already lowered the country’s sovereign rating to “BB” from “BB+” because of political turmoil. Even if Moody’s has refrained from lowering the country’s rating to sub-investment grade in August, it is likely to lower the rating before the end of 2016. Fitch is also expected to lower the grade before the end of this year. This might trigger volatility in the market as certain investors might be compelled to sell bonds, according to Commerzbank.