Uncertainty likely to remain elevated in Turkey, headline inflation likely to rise 8 pct by end-2017, says Commerzbank

Turkey’s domestic demand was already starting to slowdown much before the attempted military coup in July of this year. The slowdown was triggered by a decline in fixed investment as political and security concerns had increased in the prior year, while the negative factors deepened after President Tayyip Ergogan removed the Davutoglu cabinet and took back “hands on” control of the government, noted Commerzbank.

Currently, there are several sources of uncertainty. Firstly, the political system is moving for a major change to a presidential system. Secondly, the rule is continuing and would possibly be extended again. Thirdly, the ‘purge’ of the parallel network is ongoing, which has resulted in serious conflict with the European Union about the state of democracy in Turkey, while the EU parliament has even increased the issue of suspending EU accession talks. And fourthly, Turkey is increasingly involved in escalating military operations in Iraq and Syria.

Thus, uncertainty is expected to remain high and there is no trigger for a turnaround in business sentiment. Besides fixed investment, another driver that has started underperforming is net exports. The improvement in current account in 2014-2015 has been due to lower oil import prices. In the meantime, the decline in tourism revenue is hurting. The re-start of Russian tourism cannot totally counter this, according to Commerzbank.

“We forecast 1.9 percent GDP growth during 2017, and modest acceleration to 2.8 percent in 2018 (these compare with c.5 percent trend growth)”, added Commerzbank.

The help received from declining oil price is now reversing. Moreover, strong public sector wage rose in 2017 as a fiscal measure. A pro-growth push from the Turkish government would possibly broaden the budget deficit in 2017. These factors, along with a stronger US dollar and rebounding commodity prices would restrict downside for inflation. However, due to the wide open output-gap, inflation is unlikely to accelerate to 9 percent or 10 percent. It is expected to accelerate back towards 8 percent by the end of 2017, before it slows down slightly in 2018, stated Commerzbank.